A:

In financial terminology, "accrues" means the same thing as "accumulates." Interest is considered accrued when it is added to the balance on the account. Interest accrues on loans, such as a mortgage, or on savings accounts and investments. Daily accrual means interest amounts are added to the account balance every day.

Interest can accrue on any time schedule; common periods include daily, monthly and annually. Some modern computations have interest accrue continuously based on mathematical formulas that slice time more and more finely as time approaches zero.

## Daily Accrual Example

Consider a \$100,000 mortgage loan with a 15% APR accrued daily. Assuming the contract has a 365-day year, as some are 360, the daily interest rate can be found by dividing 15% by 365. This calculation yields a daily interest rate of 0.0410958%.

The accrued interest on the first day of the mortgage is equal to \$100,000 x 0.0410958%, or \$41.0958. The account balance on day two equals \$100,041.10 after rounding. Moving beyond day two, interest accrual depends on the compounding period.

## Compounding Interest

Accrual and compounding periods are often different. Compounding changes the account balance from which the accrual calculations take place. If interest compounds monthly, then every month has a "compound date" where past accrued interest is summed and becomes the new base balance.

Take the previous \$100,000 mortgage example. Under monthly compounding, the daily accrual amount, \$41.0958, is the same for each day in the first month. On the compound date, all of the total accrued interest to that point is added to a new base amount. Every day in the second month uses the new, compounded loan balance.

Compounding can also take place daily or annually. Generally speaking, debtors are better off with less frequent accrual and compounding periods, while savers are better off with more frequent periods.

RELATED FAQS
1. ### What formula can I use to calculate interest on interest?

Find out more about compounding interest, what it measures and how to calculate the amount of compound interest accrued using ... Read Answer >>
2. ### Why do businesses calculate accrued expenses?

Find out why businesses calculate accrued expenses, how they are applied and what circumstances give rise to accrual entries ... Read Answer >>
3. ### What does it mean to capitalize accrued interest?

Understand what it means when a company capitalizes accrued interest. Learn what constitutes accrued interest and what constitutes ... Read Answer >>
4. ### How can I tell if a loan uses simple or compound interest?

Learn the differences between simple and compound interest and how you can use mathematical calculations and lender disclosures ... Read Answer >>
5. ### What is the difference between accrued expense and accrued interest?

Learn the difference between accrued expense and accrued interest, and find out how to calculate accrued interest on a short-term ... Read Answer >>
Related Articles
1. Investing

### Understanding the Power of Compound Interest

Understanding compound interest is important for both investing and borrowing money.
2. Investing

### What's Accrued Interest?

Accrued interest has two meanings. In accounting, it is interest that has been earned, but the time for payment has not yet occurred.
3. Personal Finance

### Simple Interest Loans: Do They Exist?

Yes, they do. Here is what they are â€“ and how to use them to your advantage.
4. Investing

### The Effective Annual Interest Rate

The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
5. Investing

### How To Decipher Accrual Accounting

Accrual accounting is an important method of measuring the performance and position of a company. Learn more on how its used.
6. Investing

### Overcoming Compounding's Dark Side

Understanding how money is made and lost over time can help you improve your returns.
7. Investing

### Explaining Accrued Liability

Accrued liability is an accounting term for an expense a business has incurred but has yet to pay.
8. Personal Finance

### APR and APY: Why Your Bank Hopes You Can't Tell The Difference

Banks use these rates to entice borrowers and investors. Find out what you're really getting.
RELATED TERMS
1. ### Accrue

The ability for something to accumulate over time. In finance, ...
2. ### Compound Interest

Compound Interest is interest calculated on the initial principal ...
3. ### Periodic Interest Rate

The interest rate charged on a loan or realized on an investment ...
4. ### Discrete Compounding

Discrete compounding refers to the method by which interest is ...
5. ### Accrued Income

Income that is earned in a fund or by company by providing a ...
6. ### Accrual Rate

The rate of interest that is added to the principal of a financial ...