Definition of Debit Interest and Its Importance

Debit interest is the cost paid on loans and debts owed by the company. It is recorded as expenses in the income statement and reduces profits. Its importance lies in measuring financing cost, evaluating financial leverage, calculating return on investment, and financial planning for efficient liquidity and debt management.

Forms and Types of Debit Interest

• Bank loan interest: Financial cost imposed by banks on loans granted to companies and individuals, calculated as a percentage of the loan principal, and paid periodically (monthly or annually) according to contract terms.
• Issued bond interest: Periodic payments that the company commits to pay to bondholders for bonds it issued, calculated as a percentage of the bond's nominal value and paid according to a specific schedule until maturity date.
• Credit facility interest: Costs imposed on credit lines, overdrafts, and bank guarantees, calculated on amounts actually used and varies according to facility type and usage duration.

Accounting Treatment and Entries for Debit Interest

Upon accrual: From Interest Expense to Accrued Interest Payable Upon payment: From Accrued Interest Payable to Cash/Bank Classification: Expenses in income statement, accrued interest as current liabilities in balance sheet. Example: Accrued interest 2000 SAR 2000 from Interest Expense 2000 to Accrued Interest Payable

Where Debit Interest Appears in Financial Statements

Debit interest appears in financial statements in several places, where it is recorded as interest expense in the income statement under financing expenses, while accrued interest payable appears in the balance sheet under current liabilities, and in the cash flow statement under operating flows when actually paid, in addition to its details, interest rates, and financing sources in the notes to the financial statements.