Question

Question: What is the time value of money? Why should accountants have an understanding of compound interest, annuities, and present value concepts?

Short answer

The time value of money is described as the relation between money and time. The accountants should have knowledge of the mentioned concepts.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of the time value of money.

The term time value of money is used in accounting and finance which indicates the relationship between money and time. The dollar which is received at present has value more than the dollar promised at a particular point in time. This is because of the opportunity to invest a dollar of current and interest received on the investment.

Reasons for which accountant should now about the various concepts

The accountants should have an understanding of compound interest, annuities, and the present value concepts because they have various functions which are as follows:

Compound Interest: It is the method of calculating interest thatuses the accumulated balance of principal and interest at the end of each year.

Present value of an annuity: It refers to the single sum of money which is invested at compound interest now, for a certain number of future periods.

Present value of an ordinary annuity: It refers to the series of equal rents that are to be withdrawn at equal intervals at the end of the period.