Chapter 13

Paying and Collecting Interest

In This Chapter

arrow Understanding interest calculations

arrow Making the most of interest income

arrow 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 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 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 how to calculate and record interest expenses for each type. In addition, I discuss 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 you want. The same is true when someone else ...

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