Compound Interest Calculation Methods: Overview

With Compound Interest, interest is typically calculated on the initial principal and also on the accumulated interest from previous periods.

The general formula when interest is compounded once a year is:

A=P(1+r)n

Where:

• $A$ = the amount of money accumulated after $n$ years, including interest.
• $P$ = the principal (the initial amount you borrow or deposit).
• $r$ = the annual rate of interest (as a decimal).
• $n$ = the number of years the amount is deposited or borrowed for.

For example, if you borrow for 5 years, the formula looks like: A=P(1+r)5.

The spreadsheet formula for calculating the installment is PMT(Rate; NPer; PV; FV), where:

• Rate = annual interest rate / 12 (for monthly compounding).
• NPer = Number of Periods (typically the total number of months).
• PV = Present Value (the loan amount).
• FV = Future Value (usually 0 for a loan that will be paid off).

Additional Setups

Financial Ledgers

You can opt to use the same ledgers as those configured for other Compound Interest Calculation Methods.

If you don't, you'll need to add two Interest Sub-Ledgers under the main interest control account: one for Interest Received and one for Interest Reversed. You can, however, choose to use just one ledger if that suits your accounting preferences.

Financial Events

You must add three new Events specifically for Compound Interest Loan Products:

• In Default Interest Charged:
  • Event Attribute: In Default Interest Charged
  • Debit (Dr): Client Control
  • Credit (Cr): Interest Received or In Default Interest Received (depending on your ledger setup)
• In Default Interest Adjustment:
  • Event Attribute: In Default Interest Adjustment
  • Debit (Dr): Client Control
  • Credit (Cr): Interest Received or In Default Interest Received (depending on your ledger setup).
• In Default Interest Reversal:
  • Event Attribute: In Default Interest Reversal
  • Debit (Dr): Interest Reversed or In Default Interest Reversed (depending on your ledger setup)
  • Credit (Cr): Client Control

When setting up a new Loan Product with the Compound Interest Calculation Method, you are required to set up a corresponding Loan Agreement document for that product.