What is the effect of recording interest expense on the accounting records?

Recording interest expense results in an increase in expenses on the income statement. When interest expense is recorded, it reflects the cost of borrowing money for the period and reduces the company's net income. Since expenses are subtracted from revenues to calculate net income, this increase in expenses ultimately leads to a decrease in net income, which also affects retained earnings within equity when the company prepares its financial statements.

By recognizing interest expense, companies ensure their financial records accurately reflect the costs associated with financing, which is crucial for effective financial analysis and decision-making. As a result, this proper recognition of expenses is fundamental to presenting an accurate picture of the company's financial performance and position.