Question

• How do simple and compound interest differ?
• What is the difference between an ordinary annuity and annuity due?
• Why is time value a relevant consideration in accounting?
• What are some areas of accounting where time value comes into play?

Answer 1

Simple interest is calculated on the principal, or original, amount of a loan. Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods, and can thus be regarded as "interest on interest."

An annuity is a series of payments at a regular interval, such as weekly, monthly or yearly. ... The payments in an ordinary annuity occur at the end of each period. In contrast, an annuity due features payments occurring at the beginning of each period.

The time value of money (TVM) is an important concept to investors because a dollar on hand today is worth more than a dollar promised in the future. ... Provided money can earn interest, this core principle of finance holds that any amount of money is worth more the sooner it is received