What is interest expense?

Interest expense refers to the cost incurred by a borrower for the privilege of borrowing money. It represents the financial charge that lenders impose on borrowers for the use of their funds over a specific period. This cost is typically expressed as a percentage of the amount borrowed and is often calculated on an annual basis. Interest expense is an essential component of a company's financial statements, as it affects net income and cash flow.

In the context of financial management and accounting, understanding interest expense is crucial because it impacts how much a company needs to earn to cover its borrowing costs. When businesses secure loans or credit lines, they need to account for these expenses as they directly influence profitability. Properly managing interest expenses can lead to better financial health and can help organizations make informed decisions regarding future borrowing or investments.

The other options describe different financial concepts that do not align with the definition of interest expense. For instance, gains on investments relate to profits from asset appreciation, amounts earned from savings refer to interest income, and tax liability pertains to the obligation to pay taxes. Each of these is distinctly different from the cost associated with borrowed funds, thereby highlighting why the cost for borrowed funds is the correct definition of interest expense.