## Compound interest formula in ExcelExcel is usually used for accounting purposes to store the data and perform various types of operations on data. Compound interest formula is one of them that uses the function of Excel to get the result calculated. It is a building block of accounting and the most used formula in banking. Compound interest is advance of simple interest. Simple interest applies only to the principal amount for all years. But the compound interest is applied on both principal amount and interest added to it after a year. In this chapter of the Excel tutorial, we are going to describe the compound interest formula, its usage, and how we could use it on an Excel worksheet. ## What is the compound interest formula?A simple definition of compound interest is ## Note: For each year principal amount is different for compound interest.Compound interest is a basic building block used in accounting. It calculates the interest on principal amount firstly with some rate of interest for one year and then both principal amount and interest added to it. Understand it with the help of the following diagrammatic representation - Compound interest is calculated on the initial amount for a year and then interest accumulated with the previous amount. Unlike the simple interest, compound interest takes interest on the amount added with the principal amount after a year. We have two formulas to calculate compound interest, which is discussed in detail in this chapter with examples below: - FV = PV * (1+r)
- FV = PV * POWER((1+r), n)
## PrerequisitesThe Excel user must be familiar with some prerequisites, as following below: - First and foremost, users should be aware of the Excel interface. So, they use it without any problem.
- Before applying the compound interest formula on your Excel worksheet data, you should be familiar with some basic terms, such as principal amount, rate of interest, simple interest, and more.
- The user must at least know the basics of compound interest, its definition, formula, and how it works differently than simple interest.
- In addition, the user should also know to use the functions in Excel, such as POWER() function. POWER() function is required in one of the compound interest formulas. You can also use ^ operator instead of the POWER() function.
- Compound interest is different from simple interest. So, don't be confused between them.
## Formula of compound interestHere is the general formula to calculate the compound interest. ## Compound interest formula for single year calculationThis formula of compound interest helps to calculate the interest for a single year only Remember that - In each year, the principal amount is different, which is achieved from the calculated compound interest of the previous year. Here,
## Note: The rate of interest value in percent. So, while using it inside the compound interest formula, use it with its dividend 100. |