What is an interest rate?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
An interest rate is the percentage that sets how much interest is charged on money borrowed, or paid on money held in an interest-bearing account. For a business, the rate on a loan, overdraft or other credit sets the cost of borrowing, and it may be fixed for an agreed period or variable, moving with market conditions.
The rate itself is not entered in the books. What is recorded is the interest it produces: interest charged on a loan is usually recorded as an expense, and interest earned on a bank balance as income. Both are usually taken from the lender's or bank's statement for the period, and interest is kept apart from repayments of the amount borrowed, because only the interest is a cost to the business.
Rates are commonly quoted as a yearly figure, while interest is often worked out daily and charged monthly. The amount on each statement therefore depends on the balance and the number of days in the period, not only on the rate.
When interest has built up but has not yet been charged or paid at the end of a period, a business using accrual accounting may record it as interest payable, which is a liability. Your accountant can say whether that applies to a particular loan.
In Australia
business.gov.au's glossary describes an interest rate as the percentage from which the interest on a loan or bank account is worked out, adding that rates differ from one product to another and can be fixed or variable. It defines interest itself as the cost of borrowing money, or the money earned on an account that pays interest.
Its page on applying for a business loan names the interest rate as one of the costs and conditions that vary between loans, along with the amount that can be borrowed, the loan term, set-up costs and ongoing fees. Its balance sheet template includes interest payable among current liabilities.
Worked example
| Entry | Account | Debit (AUD) | Credit (AUD) |
|---|---|---|---|
| Interest charged for the month | Interest expense | 212.50 | |
| Business loan | 212.50 | ||
| Monthly repayment | Business loan | 1,500.00 | |
| Bank account | 1,500.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Recording the whole loan repayment as interest, or none of it, instead of using the split shown on the lender's statement.
- Leaving interest earned on the business bank account out of the books because the amount is small.
- Working out interest from the rate in the original loan offer after the lender has changed it.
Related terms
Related service
Small business bookkeeping
Your books kept current, every month.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Set up a balance sheet
business.gov.au, Australian Government. Current at 15 October 2026, released 18 January 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.