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 about compounding interest, what it measures, and how to calculate the amount of compound interest accrued using ... Read Answer >>
  2. 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 >>
  3. Simple versus compound interest

    Different methods in interest calculation can end up different interest payment. Learn the differences between simple and ... Read Answer >>
  4. How do you record adjustments for accrued revenue?

    Understand what accrued revenue is and what it's used to measure. Learn how an accountant would record an adjustment to accrued ... Read Answer >>
  5. When are expenses and revenues counted in accrual accounting?

    Take an in-depth look at the treatment of revenues and expenses within the accrual method of accounting and learn why many ... 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. 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.
  3. Investing

    4 Ways Simple Interest Is Used In Real Life

    Simple interest works in your favor when you're a borrower, but against you when you're an investor.
  4. Retirement

    Using Compounding to Boost Retirement Savings

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

    How to calculate your investment return

    How much are your investments actually returning? The method of calculation can make a significant difference in your true rate of return.
  6. Investing

    How to Make the Time Value of Money Work for You

    How to make the time value of money and power of compounding work for you. Here's a hint: Start saving now.
  7. Investing

    5 Best Ways to Earn Interest

    Learn how to use tools to increase your interest earnings. Use compounding interest and breakpoints to increase your interest income.
  8. Financial Advisor

    The Awesome Power of Compounding

    The power of compounding. It may not be sexy, but it is the surest way to accumulate wealth over time.
RELATED TERMS
  1. Accruals

    Accruals are earned revenues and incurred expenses that have ...
  2. Periodic Interest Rate

    The periodic interest rate is the interest rate charged on a ...
  3. Accrued Revenue

    Accrued revenue - a balance sheet asset - is revenue that has ...
  4. Discrete Compounding

    Discrete compounding refers to the method by which interest is ...
  5. Accrual Swap

    An accrual swap is an interest rate swap that is rangebound. ...
  6. Accrual Bond

    An accrual bond is a bond that does not pay periodic interest ...
Trading Center