Interest expense is an important financial expense that businesses need to manage closely to optimize profits and comply with accounting regulations. Understanding interest expense not only helps accountants account accurately but also helps business owners have effective financial strategies.
In this article, Bizzi will help you understand What is interest expense?, recording principles and detailed accounting methods according to Vietnamese accounting standards. Let's find out to ensure your business operates in accordance with regulations and optimize costs!
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ToggleInterest Expense is the cost that a business must pay to a lender for the use of a certain amount of borrowed capital for a specific period of time. This cost is calculated based on the loan amount and the interest rate agreed between the two parties. On the income statement, interest expense represents the amount of interest payable during the accounting period.
In essence, interest expense reflects the opportunity cost when a business uses borrowed capital instead of its own capital. It represents the financial cost that a business must bear to mobilize capital from external sources to serve production, business or investment activities.
Interest expenses in business can be classified as follows:
Interest expense is an important factor in corporate financial management, directly affecting profits, cash flow and payment obligations. Understanding the characteristics of interest expense helps businesses make appropriate financial decisions, optimize capital resources and ensure tax compliance. Below are the main characteristics of interest expense:
Understanding interest expenses helps accountants and business owners manage finances effectively, optimize capital structure and ensure compliance with relevant tax regulations.
Interest expense is the amount of money a business has to pay for the use of borrowed capital over a period of time. Effective management of interest expense plays an important role in maintaining the financial health and competitiveness of a business. Below are the main impacts of interest expense on business operations:
Impact on business results
Interest expense is part of financial expenses, directly affecting the profits of enterprises. When interest expense increases, after-tax profits decrease, affecting the ability to reinvest and develop. Especially, in the period of high market interest rates, enterprises face greater cost pressure, leading to narrowed profits.
Impact on product, goods and service prices
Interest expenses are included in the cost of products, goods and services. When interest expenses increase, product costs also increase, affecting competitiveness in the market. Therefore, controlling interest expenses helps businesses maintain reasonable prices and improve their competitive position.
Impact on solvency
Interest expense is a fixed expense that a business must pay periodically. If this expense accounts for a large proportion of total expenses, the business may have cash flow difficulties, affecting the ability to pay other financial obligations. Effective management of interest expense helps maintain a stable cash flow and ensure solvency.
Impact on financial risk
Using borrowed capital with high interest costs increases financial leverage, which means increasing financial risks. Enterprises may face the risk of insolvency if they do not manage their loans and related costs well. Especially in volatile economic conditions, controlling financial risks from interest costs is very important.
Impact on corporate income tax
According to regulations, interest expenses are deductible when calculating corporate income tax, but there are certain limits. Specifically, the total deductible interest expenses must not exceed 30% of the total net profit from business operations plus interest expenses and depreciation expenses incurred during the period. Therefore, reasonable management of interest expenses helps optimize tax obligations and avoid related legal issues.
Interest expense is the financial expense that a business must pay for the use of borrowed capital in its business operations. The determination and deduction of interest expense when calculating corporate income tax (CIT) is strictly regulated in Vietnamese law. In 2025, the Government issued Decree 20/2025/ND-CP amending and supplementing a number of articles of Decree 132/2020/ND-CP, in order to update and adjust regulations related to tax management for businesses with related-party transactions.
Related party transactions occur when enterprises have special relationships with each other in terms of capital, management or control, leading to the ability to influence the prices and profits of the participating parties. To control transfer pricing and ensure transparency in tax declarations, Decree 20/2025/ND-CP has provided specific regulations on interest expenses in related party transactions.
Accordingly, the total net interest expense (after deducting deposit interest and loan interest) deductible when determining taxable income of CIT shall not exceed 30% of the total net profit from business activities plus net interest expense and depreciation expense incurred during the period. The portion of interest expense exceeding this level may be carried forward to the next tax period, with the transfer period not exceeding 5 consecutive years from the year following the year in which the non-deductible interest expense arose.
When settling corporate income tax, enterprises need to pay attention to the regulations on interest expenses to ensure the reasonableness and validity of deductible expenses. For interest expenses incurred before 2024 but not yet deducted, Decree 20/2025/ND-CP allows enterprises to allocate these expenses evenly to the following tax periods, based on the remaining transition period, to minimize financial impacts and support enterprises in complying with tax regulations.
Compliance with regulations on interest expenses not only helps businesses optimize tax obligations but also ensures transparency and legal compliance in financial activities. Therefore, accountants and business owners need to regularly update changes in tax policies to apply effectively and avoid legal risks.
The reducing balance method of calculating interest is based on the actual amount owed after deducting the principal paid in previous periods.
The formula for calculating bank loan interest rates when borrowing capital is usually applied according to the decreasing balance, the calculation formula is as follows:
Interest payable (Month) = Current loan balance x Loan interest rate x Actual number of days maintaining balance / 365
Interest expense is calculated based on the current outstanding balance, interest rate (monthly/yearly) and actual loan tenure. The formula for calculating total interest payable is as follows:
Interest payable = Monthly interest + Odd-day interest
In there:
Understanding how to calculate helps businesses optimize costs and manage finances effectively.
Interest expense is a financial expense incurred when a business borrows capital from credit institutions or individuals to serve its business activities. Accurately accounting for interest expense helps businesses manage their finances effectively and comply with tax regulations. Below are detailed instructions on how to account for reasonable interest expense, capitalize interest expense, and unreasonable interest expense.
Interest expenses are considered reasonable and deductible when calculating corporate income tax (CIT) if they meet the following conditions:
When reasonable interest expenses arise, accounting is as follows:
In case of periodic interest payment:
In case of paying interest in advance for many periods:
When paying interest:
Allocate interest expense to each accounting period:
Capitalization of borrowing costs is the recording of borrowing costs arising during the investment in construction or production of unfinished assets into the value of that asset. According to Accounting Standard No. 16 - Borrowing costs, borrowing costs are capitalized when:
When capitalized interest expenses arise, accountants record:
For construction investment activities:
For the production of unfinished assets:
Note: Capitalization of borrowing costs ceases when the activities necessary to prepare the asset for its intended use or sale are completed. Subsequent borrowing costs are recognized as operating expenses in the period.
Unreasonable interest expenses are expenses that are not deductible when calculating corporate income tax, including:
When unreasonable interest expenses arise, accountants must still account for them as follows:
However, when determining taxable income, accountants need to exclude this unreasonable interest expense to ensure compliance with tax regulations.
Interest expense Interest expense is the expense that a business must pay for using borrowed capital for production and business activities. However, not all interest expenses are considered reasonable and deductible when calculating corporate income tax (CIT). Identifying and properly handling unreasonable interest expenses is very important to ensure compliance with legal regulations and optimize the tax obligations of the business.
According to Circular 96/2015/TT-BTC, some cases where interest expenses are not deductible when calculating corporate income tax include:
Although unreasonable interest expenses are not deductible when calculating corporate income tax, enterprises still need to fully account for them to accurately reflect their financial situation:
When paying interest:
At the end of the period, carry over costs:
Note that these expenses will not be deducted when determining taxable income for corporate income tax.
At the end of the year, when preparing the corporate income tax finalization declaration (form No. 03/TNDN), the enterprise needs to:
This ensures that unreasonable expenses are excluded from taxable income, in compliance with tax laws.
To avoid unreasonable interest expenses, businesses should:
Proper management and accounting of unreasonable interest expenses will help businesses comply with legal regulations, optimize tax obligations and improve financial management efficiency.
When a business borrows capital from an individual, the interest expense is deductible when calculating corporate income tax if the interest rate does not exceed 150% the basic interest rate announced by the State Bank of Vietnam at the time of borrowing. If the interest rate exceeds this level, the excess interest expense will not be included in the deductible expenses.
Enterprises are only allowed to deduct interest expenses when they have fully contributed their charter capital according to the registered schedule. If they have not fully contributed their charter capital, the interest expense corresponding to the remaining charter capital will not be included in the deductible expenses. Specifically, if the loan amount is less than or equal to the remaining charter capital, the entire interest expense is a non-deductible expense. If the loan amount is greater than the remaining charter capital, it is necessary to determine the non-deductible interest rate based on the remaining charter capital.
For enterprises with related-party transactions, the total interest expense (after deducting deposit interest and loan interest) deductible when determining taxable income of CIT shall not exceed 30% of the total net profit from business activities in the period, plus interest expense and depreciation expense incurred in the period. The portion of interest expense that is not deductible may be carried forward to the next tax period, but the transfer period shall not exceed 5 years.
Interest expense is not only an accounting item but also a key factor determining the financial performance of a business. Understanding how to account for and optimize this cost will help businesses better control cash flow, increase profits and ensure sustainable development.
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