What is the definition of 'interest expense' in financial terms?

Interest expense refers to the cost incurred by an entity for borrowed funds. When a company borrows money, whether through loans or bonds, it is obligated to pay interest on that borrowed amount. This is considered an expense because it represents the cost of financing, which reduces the net income of the entity.

Understanding this concept is crucial for financial accounting and reporting, as interest expenses directly impact a company’s profitability and cash flow. They are usually recorded on the income statement and are deducted from revenues to calculate net income. This expense is a vital element in assessing the overall financial health of a business, as managing debt and associated interest costs is essential for maintaining a positive cash flow.

Other options do not align with the definition of interest expense. For instance, income generated from investments refers to returns rather than costs, total revenue encompasses all sales and does not specifically relate to borrowing, and the amount saved pertains to assets rather than liabilities or expenses.