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 to whoever loans them the money.
Some businesses loan their own money and receive interest payments as income. In fact, a savings account can be considered to be 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. So the bank pays you for the use of your money by paying interest, which is a type of income for your company.
This chapter reviews different types of loans and discusses how to calculate and record interest expenses for each type. In addition, it talks about 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, such as a bank, you have to pay interest for that use, whether you’re buying a house, a car, or some other item. The same is true when someone else is using your money. ...