Question

What is the time value of money? Why should accountants have an understanding of compound interest, annuities, and present value concept?

Answer 1

Time value of money is the concept that the value of a dollar to be gotten in future is not as much as the value of a dollar on hand today. One reason is that money got today can be invested hence generating more money. Another reason is that when a person opts to get a whole of money in future as opposed to today, he is effectively lending the money and there are risks engaged with lending, for example, default risk and inflation. Default risk emerges when the borrower does not pay the money back to the loan specialist. Inflation is the ascent all in all level of costs.

Importance of Time value of money for Accountants

There are numerous applications of time value of money guideline. For instance, we can utilize it to look at the value of money streams happening at various times in future, to locate the present worth of a progression of installments to be gotten occasionally in future, to locate the required measure of current venture that must be made at a given loan fee to create a required future income, and so on.