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 U.S. GAAP Codification Accounting Topics

 Interest Calculations

 U.S. GAAP Codification,  Accounting by Topic,  Accounting Terms Financial Accounting,  Intermediate Accounting,  Advanced Accounting

 Present Value, Future Value Interest Calculation Example 1 Interest Calculation Example 1a Interest Calculation Example 2 Interest Calculation Example 2a Compound Interest Example 1 Compound Interest Example 2

Simple and Compound Interest Methods

Simple Interest
Interest = Principal x Interest rate per period x Number of periods

Compound Interest
Interests for previous periods are added to principal for the calculation of interest.
Interest for the nth period
= (Principal + Interest for period 1 +  .... + Interest for period n-1) x Interest rate per period

[Example 1, Company A]
 Company A borrowed \$200,000 on January 1, 2011.  Annual interest rate is 10%.  Calculate interest expenses for 2011, 2012 and 2013.

Simple Interest Method
 Year Principal Interest rate Interest expense Principal + Cumulative interest 2011 \$200,000 10% \$20,000 (*1) \$220,000 2012 \$200,000 10% \$20,000 (*1) \$240,000 2013 \$200,000 10% \$20,000 (*1) \$260,000

(*1) \$200,000 x 10% = \$20,000

Compound Interest Method
Interest is compounded annually.
 Year Principal Interest rate Interest expense Principal + Cumulative interest 2011 \$200,000 10% \$20,000 (*2) \$220,000 2012 \$200,000 10% \$22,000 (*3) \$242,000 2013 \$200,000 10% \$24,200 (*4) \$266,200

(*2) \$200,000 x 10% = \$20,000
(*3) \$220,000 x 10% = \$22,000
(*4) \$242,000 x 10% = \$24,200

 U.S. GAAP Codification Accounting Topics Inventory Valuation Methods Depreciation Methods Revenue Recognition Principle Accrual Basis vs. Cash Basis Accounting Basics of Journal Entries Ratios for Financial Statement Analysis Overview of Financial Statements