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All right. How to calculate interest and
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this is like I said this is a pretty
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important one because you need to know
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how to calculate it
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correctly in order to make the journal
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entries accurate.
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So first and foremost we need to talk
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about the the conceptual stuff.
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So in order to calculate the interest
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it's the principle of the note that's
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what you start with times the annual
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interest rate
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typically when you're given
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percentage rates in
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on your problems and stuff these are
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what we call aprs or annual percentage
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rates so they're based under the
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assumption of 12 months,
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even if the the node is not 12 months
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they're going to give it to you in terms
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of 12 months so that's what this last
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piece where it says
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times the time expressed in years that's
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putting it in terms of a proportion of
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the year that you're actually going to
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be using this or it's actually
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four, you'll understand what I mean by
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that when we do the examples here in
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in a second. It is important though
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that if the
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days if it's if they're the time period
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of maturity date is given to you in days
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so it's like a 90 day note
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it is important that you understand that
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a year for us we assume has 360 days
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for the purpose of computing interest
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that makes the fractions a whole lot
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more likeable and not having to do any
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crazy decimals so if it's
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90 days then we would assume it's 90 out
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of 360 rather than 90 out of 365, again
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it just makes the the
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the decimals a little bit easier to
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handle. So let's look I'm going to give
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you three examples just of what you
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could see
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and how we calculate this, so first and
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foremost the first one.
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A one year note for fifty thousand
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dollars with a six percent interest
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beginning march first,
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okay, so first we're going to start with
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the principle, so again principle
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times the principal amount times the
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interest rate
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times the year in terms of your
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expression fraction of a year
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time expressed in the fraction here
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that's going to give me my interest
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total interest. So let's put these
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numbers in what's my principal amount
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what fifty thousand
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what is my interest rate where it's six
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percent
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and what does this mean when it says
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time expressed in the fraction of the
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year well this is a one year note and
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this is going to seem
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really redundant to you but if you get
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in the practice of doing it it just
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makes things easier so you won't forget
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this is a one year note or a 12 month
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note.
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Okay. So what I'm going to do is I'm
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going to put this 12 months over 12
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months
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because it is over the course of a year
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so that six
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percent that they gave us it is under
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the assumption of a year and this is a
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year,
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so that's why I put it 12 over 12 I
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know it looks weird right now but just
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bear with me, okay, and when I do this
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calculation this is going to give me a
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total
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interest of three thousand dollars okay
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I know 12 over 12 is one but just again
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if you put it in practice and keep it in
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the system you're less likely to forget
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it.
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Okay. So let's look at another example.
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Okay.
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This one's a nine month note for fifty
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thousand dollars with a six percent
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interest beginning on july first
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okay we're at a nine month now not a 12
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month so let's go through this again.
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So again your your equation is principal
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amount
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times the interest rate times the time
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expressed in a fraction of a year
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that gives you your in your income or
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your total interest using.
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Principal amount still fifty thousand
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interest rates still six percent but
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here's where it differs
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okay because this is not a 12 month note
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this is only nine months so we're only
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going to be taking a portion of the six
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percent
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so what we're going to do is we're going
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to divide it 9 over 12,
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that's why the last one I did 12 or 12
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because it was a year
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but this one we're going to do 9 over
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12. We have to do that or we're going to
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be charging ourselves too much
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and this is going to be our weekly
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receiving too much and that's going to
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give me a total interest of 20 to 50,
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I'm going to give you one more example
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of how to do this calculation what
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happens if they give it to you in days
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just to kind of show you the other side.
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So what if it's a 90day note
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for fifty thousand dollars at six
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percent interest on november first,
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so again same thing you still got your
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principal amount times your interest uh
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rate times your time expressed in a
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fraction of a year
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gives you your interest total interest,
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so again principal amount is 50,000
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interest rate is six percent
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but the time expressed in a fraction of
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the year this time we're going to start
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with a numerator of 90
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but we're going to divide it by that
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banker's rule of 360 and again it makes
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the the fraction a little bit more
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palpable,
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and by doing this calculation it will
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give me a total interest of 750,
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so that's how you do just the
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calculations for the
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the interest. In the next video I'm going
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to show you how to do the entire example
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of
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interest are in notes receivables so
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that'll give you a little bit more
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clarity.
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Appreciate it.