Simple vs Compound Interest

Interest is payment for the use of money for a specified period of time. Interest can be calculated on either a simple or a compound basis. The distinction between the two is important because it affects the amount of interest earned or incurred. Simple Interest Simple interest means that the interest payment is computed on only the amount of the principal for one or more periods. That is, if the…

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Time Value of Money (TVM)

Time Value of Money (TVM): Definition Time value of money (TVM) is the concept that money paid or received in the future is not as valuable as money paid or received today because the money received today can be invested and, therefore, has the potential to increase in value. Time Value of Money: Explanation Perhaps you’ve seen the adverts claiming that if you invest $2,000 a year in an Individual…

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Present Value of a Single Amount

What Is the Present Value of a Single Amount? The value of a future promise to pay or receive a single amount at a specified interest rate is called the present value of a single amount. Present Value of a Single Amount: Explanation Many times in business and life, we want to determine the value today of receiving a specific single amount at some time in the future. For example, suppose you want t…

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Present Value of an Annuity

Present Value of an Annuity: Definition The present value of an annuity refers to the present value of a series of future promises to pay or receive an annuity at a specified interest rate. The value today of a series of equal payments or receipts to be made or received on specified future dates is called the present value of an annuity. Present Value of an Annuity: Explanation As with the future…

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Notes Payable

Notes Payable: Definition Notes payable is a liability that results from purchases of goods and services or loans. Usually, any written instrument that includes interest is a form of long-term debt. Notes Payable: Explanation A firm may issue a long-term note payable for a variety of reasons. For example, notes may be issued to purchase equipment or other assets or to borrow money from the bank fo…

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Future Value of an Annuity

What Is the Future Value of an Annuity? The future value of an annuity is the amount of a series of payments or receipts taken to a future date at a specified interest rate. Future Value of an Annuity: Explanation An annuity is a series of equal payments made at specified intervals. Interest is compounded on each of these payments. Annuities are often called rents because they are like the payment…

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Contingent Liabilities

Contingent Liabilities: Definition Contingent liabilities are potential liabilities that may or may not occur depending on future events. Contingent Liabilities: Explanation A contingent liability is the result of an existing condition or situation whose final resolution depends on some future event. Generally, the amount of these liabilities must be estimated; the actual amount cannot be determin…

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Current Liabilities

Current Liabilities: Definition Current liabilities are those liabilities that will either be paid or will require the use of current assets within a year (or within the operating cycle, if longer), or that result in the creation of new current liabilities. Current vs. Long-Term Liabilities When preparing a balance sheet, liabilities are classified as either current or long-term. Current liabiliti…

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Liabilities

Liabilities: Definition Liabilities are probable non-ownership claims against a business firm. Liabilities must arise from events that occurred in the past and are expected to be satisfied in the future. Liabilities can be held by owners if they originate through transactions in which the owners acted in the capacity of a non-owner. For example, a company will incur and report a liability that ari…

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Measuring and Recording Liabilities

Liabilities are generally recorded and disclosed at the present value of the future payments, computed using a realistic interest rate. The existence of a nominal interest rate that is unrealistic makes the measurement task more difficult. The effect of complying with this rule is a description of the proper relationship between the amount actually borrowed and the amount of interest incurred duri…

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