DEFINITION of Ratable Accrual Method
The ratable accrual method is a method for determining how much income was earned over a period of time and when within the period it was earned. The ratable accrual method can be used to compute the interest income for tax purposes. This is opposed to the payment method, and could be used to find the accrued market discount of a discount bond traded in the secondary bond market. It can also be used to determine property tax on real estate held over several tax periods.
BREAKING DOWN Ratable Accrual Method
The ratable accrual method usually results in a greater accrual of discount than the other method for determining accrued market discount, which is the constant yield method. However, it also uses a simpler calculation: market discount is divided by the number of days from the bond's maturity date minus the purchase date, multiplied by the number of days the investor actually held the bond.
Example of the Ratable Accrual Method
For example, if you bought a $20,000 bond for $18,000 with 400 days until expiry, then you sold that bond 300 days later for $19,500. To compute interest income, you would multiply the portion of the days held by the increase in value. 300/400 = 0.75. $19,500-$18,000 = $1,500. 0.75 x $1,500 = $1,125 interest income for tax purposes.