Effective Annual Interest Rate

Effective Interest Rate

The total amount of interest earned or paid in a year on any financial products, loans etc. is called as the effective annual interest rate. The effective annual interest rate is also known as an effective interest rate.

So, how to calculate effective interest rate? Here is the formula: r = (1+i/n) n -1

r= effective interest rate   n = no. of periods   i= annual interest rate

Effective annual interest rate calculates while considering compound rates instead of static interest rates.

Capital Budgeting

Accounting term - SlickAccount
Capital Budgeting – SlickAccount

Capital Budgeting is a process which analyzes the frequency of return on long-term & short-term investments to be made by a business. Capital Budgeting is same as Investment appraisal.

Capital Budgeting is an important & complex task as the analysis needs to be accurate to determine the return value of investments.

Continue reading “Capital Budgeting”

Accounting Rate of Return

Accounting rate of return also called as Average rate return. Accounting rate return calculates the amount of profit company/entity incurred from the money invested. Accounting rate of return never considers the time value of money.

The formula to calculate accounting rate of return is: Average return during period / Average investment

Average Investment = Book value at the beginning of 1st year + Book value at the end of useful life /2

Average return during period = Profit after tax/ Life of investment

Accelerated Depreciation

Accelerated depreciation is a method to calculate the book value of a fixed asset over the years. In this method, the relative asset incurred higher expenses than last remaining years, unlike straight-line method.

There are two methods two calculate accelerated depreciation i.e. double declining balance method and Sum of the years’ digits method.

Double declining balance method formula

Annual Depreciation Expenses = Net Book Value x 2/Useful life in years

Sum of the years’ digits method formula

Depreciation Expense = Remaining useful life of asset / Sum of the years digits x Depreciable Cost