Accounting of Compound interest
Compound Interest account
Compound interest: it is the interest which is calculated not only on the original principal invested, but also on the interest earned in privies periods.
10
A principal of Rupees 1000 invested at 10% would yield ___ x 1000
100
10
= Rupees 100 in the first year ______ x (1000 + 100) = Rupees 110 in the second year.
100
This contrasts simple interest in which interest is calculated on the original principal only, for all years.
Relation is between simple interest and compound interest.
Amount = A
Principal = P
Rate of interest = R
Time period = T
P = 3000
R = 10%
T = 2 years
R
A = P (1 + __.) T
100
In order to find out the compound interest at the end of the first year, apply the simple interest formal.
P x T x R
S.I = __________
100
3000 x 1 x 10
= ____________
100
C.I = S.I = 300 at the end of I year
Second year can be found out,
P = 3300. R = 10. T = 1 year.
P x T x R
C.I for 2 years = _________
100
3300 x 1 x 10
= ______________
100
C.I = 330
Therefore, total compound interest = 300 (end of the first year) + 330 (end of the second year
= Rupees 630.
The same compound interest can also be calculated by the following C.I formula
R.
C.I = P [(1 + ___.) T - 1]
100
10
= 3000 [(1 + ____.) 2 - 1]
100
= 3000 [(11) 2 -1]
____
10
121
= 3000 [.___ - 1]
100
(21)
= 3000 ____ = Rupees 630.
100
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