Hi,
I see a lot of assumptions being made in models when modelling cash interest vs accounting interest. For simplicity let's say this is interest being paid out for term loans.
What should, in concept, be the actual difference in modelling the two? i.e. if cash interest = op. balance * interest rate, how should the accounting interest differ?
Thanks!
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If the interest on your TL accrues quarterly but is only paid at the end of the year in full/paid at maturity, there’ll be a difference in cash and accounting interest. Your accrued interest will sum up throughout the tenor what is owed to the lender and will become zero once it’s paid in full at maturity. In the meantime, you’ll recognise interest expense periodically on your income statement but also create an accrued interest/payables balance
Of course. Thanks for the note ddp!
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