The time value of money is the idea that money at present day is worth a lot more than the same amount would be in the future, this is made likely because of possible earning capacity. Money that is received sooner is worth more, on the basis that money is able to earn interest (Fernando, 2021). Inflation is also something that can have a bearing on the value of money, money today has greater value than money in the future. According to Fernando, 2021, the interest on a deposit or a loan is compound interest. Compound interest is calculated on the interest that has accumulated plus the principal amount. This type of calculation will make the total figure increase faster than if the other option of simple interest were used. The period for which compound interest is calculated may vary from daily to yearly. A significant difference is seen based on the number of compounding periods. For an accountant it is important to look at the growth that can result from compound interest and the time value of money as this can help with income optimization.
It is important for an accountant to have an understanding of annuities, present values and future values. According to boundless accounting (N.D), an annuity is a loan that is paid pack over an agreed period at a specific interest. An accountant needs to know how annuities work so they are able to plan for the payments and ascertain how long it will take them to pay the loan plus interest. One variable that affects an annuity is present value. At the time an annuity is created it is at time 0, this is the present value. Discounting is what is used when calculating present value and it is helpful in showing whether or not it would be lucrative to make certain investments as they may not yield a good return. The future value is how much value an annuity will be at the end of the set period. Being able to come up with an estimation of how much is expected from an investment is beneficial in planning and decision making.
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References
Fernando, J. (2021). Time Value of Money . https://www.investopedia.com/terms/t/timevalueofmoney.asp
Fernando, J. (2021). Compound Interest. https://www.investopedia.com/terms/c/compoundinterest.asp
Boundless Accounting. (N.D). Annuities . https://courses.lumenlearning.com/boundless-accounting/chapter/annuities/
