Chapter 7, Problem 7.1Q

To determine

To explain: The concept of interest.

Answer to Problem 7.1Q

Interest can be received or paid. It is received the amount has been provided to others and paid when it is taken from others. The interest amount is generally charged for consideration of inflation and time value of money.

Explanation of Solution

Solution:

Interest:

Interest refers to the amount which is supposed to be received on the money to be provided to other or to be paid on money to be received from others on credit or on loan. It is the amount that is charged on utilizing the money provided to others.

• Interest is the fixed charged on some borrowed fund or the money provided to others. It works as the return on the funds invested for the person who provided the funds.
• Interest is of two types that is simple interest and compounded interest. Simple interest is the type of interest where the rate of interest as well as the amount of interest remains same in each period.
• While compound interest is the interest in which the rate is fixed but the amount of interest gets bigger with the passing of each period as it includes computation of next period’s interest on the current interest amount as well.

Conclusion

Thus, interest is the amount to be charged on the borrowed funds.