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, on savings accounts and on investments.

Interest can accrue on any time schedule; common periods include daily, monthly and annually. Daily accrual, for example, means interest amounts are added to the account balance every day. 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 (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 calculates interest on interest?

    Find out more about compounding interest, what it measures, and how to calculate the amount of compound interest accrued ... Read Answer >>
  2. 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 >>
  3. 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. Personal Finance

    Simple Interest Loans: Do They Exist?

    Yes, they do. Here is what they are – and how to use them to your advantage.
  2. Personal Finance

    How Interest Rates Work on Savings Accounts

    Here's what you need to know to grow your rainy-day fund.
  3. Retirement

    Using Compounding to Boost Retirement Savings

    Allowing growth on your investments to compound over time gives you immense returns when saving for retirement.
  4. Retirement

    Compounding Is Important in the Later Years Too

    The power of compounding is even greater in the later years of saving for retirement.
  5. Investing

    The Interest Rates: APR, APY And EAR

    When most people shop for financial products, all they focus on is the listed interest rate. Human eyes instinctively dismiss the fine print, which usually includes the terms APR (annual percentage ...
  6. Investing

    How to Calculate Your Investment Return

    How much are your investments actually returning? Find out why the method of calculation matters.
RELATED TERMS
  1. Accrual Rate

    Accrual rate refers to the rate of interest that is added to ...
  2. Accrued Interest

    1. A term used to describe an accrual accounting method when ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal ...
  4. Continuous Compounding

    Continuous compounding is the process of calculating interest ...
  5. Compounding

    Compounding is the process in which an asset's earnings, from ...
  6. Effective Annual Interest Rate

    Effective Annual Interest Rate is an investment's annual rate ...
Trading Center