Accounting All-in-One For Dummies, with Online Practice, 2nd Edition

Chapter 2

Paying and Collecting Interest

IN THIS CHAPTER

Understanding interest calculations

Making the most of interest income

Calculating loan interest

Few businesses are able to make major purchases without taking out loans. Whether loans are for vehicles, buildings, or other business needs, businesses must pay interest, a percentage of the amount loaned, to their lenders.

Some businesses also loan money to borrowers and receive interest payments as income. In fact, a savings account can be considered a type of loan because by placing your money in the account, you’re giving the bank the opportunity to loan that money to others. That interest is income for your company.

This chapter reviews different types of loans and how to calculate and record interest expenses for each type. It also explains how you calculate and record interest income in your business’s books.

Deciphering Types of Interest

Any time you make use of someone else’s money (whether that someone else is an individual or a bank), you have to pay interest for that use — whether you’re buying a house, a car, or some other item you want. The same is true when someone else is using your money. For example, when you ...