Standard Interest Accrual Accounting
Interest in the Nortridge Loan System accrues on a daily basis based on one of three methods: simple interest, fixed amortization, or rule of 78s.
Simple Interest: the interest is computed on the current principal balance, which is multiplied by the interest rate to determine annual interest, then divided by a factor to derive the daily interest. This factor is determined by the interest year setting of the loan.
Fixed Amortization: the interest is computed on the expected principal balance from the amortization schedule, which is multiplied by the interest rate to determine annual interest, then divided by a factor to derive the daily interest. As above, the interest year setting determines this calculation.
Rule of 78s: the expected interest over the life of the loan is pre-computed. This pre-computed interest is divided by the summation of the total number of payments. This payment factor is then multiplied by a declining number, beginning with the total number of payments, and decreasing by one, until for the final payment the number is one. The resulting figure is the interest for the period in question and is divided by the number of days in the current period to derive the daily interest. For more information on this procedure, see Add On Interest.
The method by which this daily interest posts to the General Ledger is determined by the use of accrual basis or cash basis accounting. The default setup of the Nortridge Loan System is for accrual basis.
For information on the default setup and how the accrual is posted to the ledger, see Accrual Basis Accounting.
For information on how to reconfigure the setup for cash basis, see Cash Basis Accounting.