All right. How to calculate interest and
this is like I said this is a pretty
important one because you need to know
how to calculate it
correctly in order to make the journal
entries accurate.
So first and foremost we need to talk
about the the conceptual stuff.
So in order to calculate the interest
it's the principle of the note that's
what you start with times the annual
interest rate
typically when you're given
percentage rates in
on your problems and stuff these are
what we call aprs or annual percentage
rates so they're based under the
assumption of 12 months,
even if the the node is not 12 months
they're going to give it to you in terms
of 12 months so that's what this last
piece where it says
times the time expressed in years that's
putting it in terms of a proportion of
the year that you're actually going to
be using this or it's actually
four, you'll understand what I mean by
that when we do the examples here in
in a second. It is important though
that if the
days if it's if they're the time period
of maturity date is given to you in days
so it's like a 90 day note
it is important that you understand that
a year for us we assume has 360 days
for the purpose of computing interest
that makes the fractions a whole lot
more likeable and not having to do any
crazy decimals so if it's
90 days then we would assume it's 90 out
of 360 rather than 90 out of 365, again
it just makes the the
the decimals a little bit easier to
handle. So let's look I'm going to give
you three examples just of what you
could see
and how we calculate this, so first and
foremost the first one.
A one year note for fifty thousand
dollars with a six percent interest
beginning march first,
okay, so first we're going to start with
the principle, so again principle
times the principal amount times the
interest rate
times the year in terms of your
expression fraction of a year
time expressed in the fraction here
that's going to give me my interest
total interest. So let's put these
numbers in what's my principal amount
what fifty thousand
what is my interest rate where it's six
percent
and what does this mean when it says
time expressed in the fraction of the
year well this is a one year note and
this is going to seem
really redundant to you but if you get
in the practice of doing it it just
makes things easier so you won't forget
this is a one year note or a 12 month
note.
Okay. So what I'm going to do is I'm
going to put this 12 months over 12
months
because it is over the course of a year
so that six
percent that they gave us it is under
the assumption of a year and this is a
year,
so that's why I put it 12 over 12 I
know it looks weird right now but just
bear with me, okay, and when I do this
calculation this is going to give me a
total
interest of three thousand dollars okay
I know 12 over 12 is one but just again
if you put it in practice and keep it in
the system you're less likely to forget
it.
Okay. So let's look at another example.
Okay.
This one's a nine month note for fifty
thousand dollars with a six percent
interest beginning on july first
okay we're at a nine month now not a 12
month so let's go through this again.
So again your your equation is principal
amount
times the interest rate times the time
expressed in a fraction of a year
that gives you your in your income or
your total interest using.
Principal amount still fifty thousand
interest rates still six percent but
here's where it differs
okay because this is not a 12 month note
this is only nine months so we're only
going to be taking a portion of the six
percent
so what we're going to do is we're going
to divide it 9 over 12,
that's why the last one I did 12 or 12
because it was a year
but this one we're going to do 9 over
12. We have to do that or we're going to
be charging ourselves too much
and this is going to be our weekly
receiving too much and that's going to
give me a total interest of 20 to 50,
I'm going to give you one more example
of how to do this calculation what
happens if they give it to you in days
just to kind of show you the other side.
So what if it's a 90-day note
for fifty thousand dollars at six
percent interest on november first,
so again same thing you still got your
principal amount times your interest uh
rate times your time expressed in a
fraction of a year
gives you your interest total interest,
so again principal amount is 50,000
interest rate is six percent
but the time expressed in a fraction of
the year this time we're going to start
with a numerator of 90
but we're going to divide it by that
banker's rule of 360 and again it makes
the the fraction a little bit more
palpable,
and by doing this calculation it will
give me a total interest of 750,
so that's how you do just the
calculations for the
the interest. In the next video I'm going
to show you how to do the entire example
of
interest are in notes receivables so
that'll give you a little bit more
clarity.
Appreciate it.