Question

What is the time value of money (TVM)? Why should accountants have an understanding of compound interest, annuities, and present value concepts? In addition, what is the nature of interest? What is the difference between “simple interest and compound interest?”

Answer 1

Time value of money is the value of money that one have at present time having worth more than the same amount in the future due to its capacity of potential earning. Any type of income can be earned if the money is available with you at present that is why worth of money will always be more the sooner it is received.

Accountants have an understanding of compound interest, annuities, and present value concepts because these are applied to many type of business events and transactions requiring proper presentation and valuation. Above mentioned concepts are applied in leases, estimation of fair value, long term assets, etc.

Interest is a term which describes claim, privilege or right that one has for real or personal property.

Both simple interest and compound interest helps you in growing your income but a big difference between both is that simple interest is paid only on capital while compound interest is paid on principal amount plus all the interest which is earned by one in previous periods.

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