Definition of Interest

" Interest is the payment which is given for taking of money. It is the award of sacrificing the fund. When a businessman invests his money in securities, he can either earn dividend or interest. Dividend is not fixed income but interest is fixed income on investment. "

In the financial market, main income of banks is interest. Bank accepts the small saving of public at low rate of interest and distributes this cash to productive and non productive area for getting higher rate of interest. Difference of received and paid interest is the net income of bank. Interest is calculated always on the principle amount.

There are two main methods to calculate of interest. First is simple interest method. Under this we can calculate interest by applying simple basic formula. In this method, interest is not calculated on previous amount of interest.

Simple Interest = We can also calculate compound interest. If the contract states the condition for paying compound interest on borrowed money, then it should be calculated with following formula.In this method, previous year interest will be included in the current year principle.

Compound Interest =  .

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Accounting Education: Interest
Interest