Time Value of Money

The concept of the time value of money implies that the cash a person receives today is worth more than the cash promised in the future. This concept plays a critical role to financial experts. Precisely, accountants must possess a working knowledge of concepts that include present value, annuities and compound interest because these concepts are applicable to business transactions and events that require proper valuation and presentation. With the knowledge, the accountant would be able to apply the concepts in sinking funds, pensions, leases, long-term assets, installment contracts, notes receivable and payable and amortization of premiums and discounts (Needles, Powers & Crosson, 2013). Moreover, the time value of money has an effect on the accountant due to the cost principle and revenue recognition principle.

The key items that an accountant must understand around present and future value concept include the following. The present value of a single sum refers to the worth of a given sum due n periods that is discounted at i compound interest (Needles, Powers & Crosson, 2013). The present value of an annuity entails the single sum, which when invested at a compound interest would allow for a series of equal withdrawals at regular intervals. The future value of a single sum consist of the future value of $1 if it is deposited now at a given rate and left to accumulate for a specific number of period. The future value of annuity refers to the sum of all rents invested at a compound interest (Needles, Powers & Crosson, 2013). With an annuity, the key elements include an ordinary annuity, which implies that each rent is payable (receivable) at the end of the period. Annuity due implies that each rent is payable or receivable at the beginning of the period. An accountant must understand the fundamental items in the compound interest and they include the rate of interest, number of compounding periods, future amount and present value.

Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting. Cengage Learning.

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