How to Calculate Interest Expense
Understand the interest expense formula., Gather your loan information., Adjust the period of time in your calculation., Use a spreadsheet to calculate interest.
Step-by-Step Guide
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Step 1: Understand the interest expense formula.
The formula to calculate interest is Interest = Prt where "P" equals Principal, or the amount of the loan outstanding, "r" equals the rate of interest charged, and "t" equals the amount of time that the loan will be outstanding.
Your principal is the loan balance that is still owed to the lender.
Your rate of interest will be stated in the loan agreement., Assume that the remaining balance on your loan is $10,000.
The interest rate stated on your loan agreement is 12% annually.
Your interest expense for a 12 month or 1 year period would be $10,000 multiplied by 12%, or $1,200. , You may need to calculate interest expense for a fraction of a year.
Use the same interest rate formula and adjust the time period.Determine the period of time to properly recognize interest expense.
If you need to calculate three months of interest expense, divide the 12 months by the number of months in the desired period.
For example, t = 3/12 or
0.25.
If the principal is $10,000 and the interest rate is 12 percent (0.12), the calculation would be Interest = $10,000 x
0.12 x
0.25 or $300. , You can speed up this process by using a spreadsheet application. label columns A,B.C and D "Principal"
"Rate"
"Time"
and "Interest".
In cell A2, insert the Principal amount or $10,000.
In cell B2, insert the rate of interest or .12.
In cell C2, insert the time where a year or 12 months equals
1.
Use multiples and fractions where the period is less or greater than one year.
In cell D2, enter the formula (A2*B2*C2). -
Step 2: Gather your loan information.
-
Step 3: Adjust the period of time in your calculation.
-
Step 4: Use a spreadsheet to calculate interest.
Detailed Guide
The formula to calculate interest is Interest = Prt where "P" equals Principal, or the amount of the loan outstanding, "r" equals the rate of interest charged, and "t" equals the amount of time that the loan will be outstanding.
Your principal is the loan balance that is still owed to the lender.
Your rate of interest will be stated in the loan agreement., Assume that the remaining balance on your loan is $10,000.
The interest rate stated on your loan agreement is 12% annually.
Your interest expense for a 12 month or 1 year period would be $10,000 multiplied by 12%, or $1,200. , You may need to calculate interest expense for a fraction of a year.
Use the same interest rate formula and adjust the time period.Determine the period of time to properly recognize interest expense.
If you need to calculate three months of interest expense, divide the 12 months by the number of months in the desired period.
For example, t = 3/12 or
0.25.
If the principal is $10,000 and the interest rate is 12 percent (0.12), the calculation would be Interest = $10,000 x
0.12 x
0.25 or $300. , You can speed up this process by using a spreadsheet application. label columns A,B.C and D "Principal"
"Rate"
"Time"
and "Interest".
In cell A2, insert the Principal amount or $10,000.
In cell B2, insert the rate of interest or .12.
In cell C2, insert the time where a year or 12 months equals
1.
Use multiples and fractions where the period is less or greater than one year.
In cell D2, enter the formula (A2*B2*C2).
About the Author
Nancy Gomez
Enthusiastic about teaching hobbies techniques through clear, step-by-step guides.
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