Bank interest is a common part of accounting, and understanding how to calculate it and record it properly in accounting software like TallyPrime is essential for accurate financial tracking.
Bank interest is the money you earn from the bank when you deposit funds into an interest-bearing account (like savings or fixed deposit accounts). Banks pay interest as a percentage of the balance you hold, and this is typically calculated based on an annual percentage rate (APR).
Understand the Key Terms for Loan Interest Calculation
Before you can calculate loan interest, you need to know the following details about the loan:
- Loan Amount (Principal): The amount of money you’ve borrowed.
- Interest Rate: The rate at which interest is charged, usually an annual percentage rate (APR).
- Time Period: The length of time you will repay the loan, typically in months or years.
- Repayment Frequency: How often interest is charged (monthly, quarterly, annually).
Calculate Loan Interest
There are different methods for calculating loan interest, but the two most common ones are Simple Interest and Compound Interest.
1. Simple Interest
The formula for calculating simple interest is:
Simple Interest = (Principal × Rate × Time) ÷ 100
Where:
- Principal is the loan amount.
- Rate is the interest rate per year.
- Time is the loan term in years.
Example:
Let’s assume you took a loan of ₹100,000 at an interest rate of 8% per year for 2 years. To calculate the simple interest:
Interest = (100,000 × 8 × 2) ÷ 100
Interest = ₹16,000
So, the total interest on ₹100,000 over 2 years at 8% per year will be ₹16,000.
2. Compound Interest
Compound interest is more complicated, as it’s calculated on the principal plus any interest that has already been added to the loan. The formula for compound interest is:
Compound Interest = P × (1 + (r/n))^(nt) – P
Where:
- P is the principal loan amount.
- r is the annual interest rate (in decimal form).
- n is the number of times interest is compounded per year (e.g., monthly = 12).
- t is the time the money is borrowed for, in years.
Example:
For the same ₹100,000 loan at 8% annual interest, compounded monthly for 2 years, the compound interest formula would look like this:
Compound Interest = 100,000 × (1 + (0.08/12))^(12×2) – 100,000
Compound Interest = ₹16,612.15
The total compound interest for the same loan amount, time, and rate comes out to ₹16,612.15 (slightly higher than the simple interest calculation due to compounding).