Interest Accrual Basis is a component of the formula that is used to calculate the accrued interest. The formula is as below:
Accrued Interest = (Principal) ＊ ( Interest Rate per Day) * (Days in a Month).
If Interest Rate per Day is not available and only the Annual Interest Rate is available(Which is often the case). The formula is as below:
Accrued Interest = (Principal) * (Annual Interest Rate/ Days in a Year) * (Days in a Month), so changed to:
Accrued Interest = (Principal) * (Annual Interest Rate) * (Days in Month) / (Days in a Year)
So the (Days in Month) / (Days in a Year) is named as the Accrual Basis. The rules have a Numerator and a Denominator.
The Numerator represents the number of days between the from data and the to date in the accrual cycle = Days in a Month = 30/31/Actual
The Denominator represents the number of days in a year in the accrual cycle = Days in a Year = 360/365/366
There are a number of rules/conventions/bases to calculate the days in a month and the days in year and thereby the Interest Rate per Day. These rules /conventions/bases are termed as Accrual Basis, it is based on these rules that the accrued interest is calculated.
The Accrual basis is also referred to as 'Day count convention' . There is an item in wiki, see refer for more: http://en.wikipedia.org/wiki/Day_count_convention.
The wiki's version is much more complex than FCR's. It's for bond interest computing.
Accrued Interest = (Principal) ＊ ( Interest Rate per Day) * (Days in a Month).
If Interest Rate per Day is not available and only the Annual Interest Rate is available(Which is often the case). The formula is as below:
Accrued Interest = (Principal) * (Annual Interest Rate/ Days in a Year) * (Days in a Month), so changed to:
Accrued Interest = (Principal) * (Annual Interest Rate) * (Days in Month) / (Days in a Year)
So the (Days in Month) / (Days in a Year) is named as the Accrual Basis. The rules have a Numerator and a Denominator.
The Numerator represents the number of days between the from data and the to date in the accrual cycle = Days in a Month = 30/31/Actual
The Denominator represents the number of days in a year in the accrual cycle = Days in a Year = 360/365/366
There are a number of rules/conventions/bases to calculate the days in a month and the days in year and thereby the Interest Rate per Day. These rules /conventions/bases are termed as Accrual Basis, it is based on these rules that the accrued interest is calculated.
The Accrual basis is also referred to as 'Day count convention' . There is an item in wiki, see refer for more: http://en.wikipedia.org/wiki/Day_count_convention.
The wiki's version is much more complex than FCR's. It's for bond interest computing.
Two concepts for interest calculation: Accrual (计息) vs. Capitalization ( 结息).
Accrual is the process of calculating interest on each of the accounts and accumulate it and show it on bank’s books. Interest is not added to customer account during accrual.
Broken Period: The period during which the interest is charged at a different rate if Index, Account or product level is changed between two installment calculations.
Several dimensions when considering different interest rule.
A. Credit/Debit Accrual Basis: (借/贷方计息基础)
B. Interest Rate & Balance Base (利率和余额基础)
C. Interest Capitalization Basis & Capitalization Frequency (结息基础和结息频率)
D. Tier Type (分层类型)
E. Interest Accrual Frequency (计息频率)
For Accrual Basis, let’s give a sample. When using the Actual/360 and Actual/365 type basis, the days of a month and a year is showed in the below table:
| Serial No. | Month | Year | Computation using Actual/360 | Computation using Actual/365 |
| 1 | January | Normal Year | 31/360 | 31/365 |
| 2 | January | Leap Year | 31/360 | 31/366 |
| 3 | February | Normal Year | 28/360 | 28/365 |
| 4 | February | Leap Year | 29/360 | 29/366 |
| 5 | April | Normal Year | 30/360 | 30/365 |
| 6 | April | Leap Year | 30/360 | 30/366 |
| 7 | Broken Period | Normal Year | 15/360 | 15/365 |
| 8 | Broken Period | Leap Year | 15/360 | 15/366 |
Accrual Frequency: Accrual has following frequencies in FC. It is defined at the product level. Interest Accrual posts to the following two GL accounts:
Dr. Interest Expense GL
借: 利息支出科目
Cr. Interest Accrual GL
贷: 应计利息科目
FCR supports the following frequency:
- Daily
- Monthly
- Bi-Monthly
- Quarterly
- Half-Yearly
- Yearly
In FCR, the process of Daily Accrual is as below:
For all accounts having daily accrual frequency, individual account level accrual are not passed. But one consolidated entry is passed for a branch and product combination, that is one entry for all accounts of one product belongs to a particular branch.
In FCR, the process of Monthly Accrual is as below:
GL entries are passed at account level. Individual GL entries will be passed for each account separately.
Balance Base: someone or some products would prefer the daily end balance or average balance or monthly average balance or minimum monthly balance. Balance Base should match with the accrual frequency specified, although some frequencies can use several different balance bases.
Interest Rate: Sometimes, interest rate should be maintained at the account level tiers. Since in most of the cases, the interest rates are tiered, so cumulative or incremental interest can be calculated based on the specified rules.
Interest Capitalization: After capitalization, the account’s balance will be updated. So the interest frequency will influence the amount of interest.
Incremental vs Cumulative
For the interest charging / payment to the customer the bank can use tiers /slabs, there are two methods on which bank can pay /charge interest to the customer.
- Increment – the interest will be calculated on the basis of each slab, the amount to be considered for interest payment / charging is incremented on the slabs that are defined.
- Cumulative – interest charging /payment will be considered on the basis of the slab, the highest slab interest rate is considered while payment /charging the interest.
| Tier No. | Interest Index Code | Interest Rate |
| 1 | 2000 | 10 |
| 2 | 3000 | 15 |
| 3 | 4000 | 20 |
In case the customer’s account balance is 3500 then in the case of cumulative type, the interest rate for 3500 will be 20%.
In case of increment type, the interest will be calculated as 2000 @10%, 1000@ 15% and the balance 500 @20%.
