UK Accounting Glossary
When interest is applied to capital and accrued up until that particular date. For example, a £1,000 loan with 20% interest will have a balance of £1,200 after the first year, then £1,440 at the end of the second year.
Compound interest is the payment of interest on both principal as well past accrued interest. The opposite of compound interest is simple interest. Without compound interest, a $100 savings account at 10% per year earns a flat $10 in interest each year. After 10 years that non-compound interest savings account is worth $200. With compound interest that same $100 savings account earns $10 in interest the first year, but earns increasing amounts of interest in each subsequent year. The reason is that with compound interest, interest is paid on the previous years’ interest. After 10 years our $100 savings account with compound interest is worth more than $259. Albert Einstein called compound interest the eighth wonder of the world.
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This glossary post was last updated: 28th December 2018.