How to Calculate Single Sums
Single-sum problems involve a single amount of money that you either have on hand now or want to have in the future. You use these two tables to figure single sums:
Future value of 1: This table shows how much a single sum on deposit will grow when invested for a specific period of time at a particular interest rate. For example, you deposit $500 in the bank today and want to know how much you’ll have two years from now.
Present value of 1: The flipside of future value, this table tells you how much you’ll have to save today to have a certain amount at your disposal in the future. For example, you want to have $2,000 saved for a down payment on a new car in three years — how much do you need to put away today to reach that goal?
Future value of a single sum
Suppose that a company with an extra $100,000 lying around is trying to decide between investing the money at 4 percent for five years and using the extra money to expand the business. It sure would help if they know how much the $100,000 would grow if they invested it.
Future value table to the rescue! Using this table, the company can calculate exactly what the $100,000 will grow to using the three variables of principal ($100,000), time (five years), and rate (4 percent).
For this calculation, you find the number at the intersection of 4 percent and five periods, which is 1.21665. Multiply $100,000 times 1.21665 to get the future value of a single sum of $100,000. The future value of that single sum is $121,665 ($100,000 x 1.21665).
The company now has valuable information. If it reckons that using the $100,000 to expand the business won’t increase the bottom line over the next five years by at least $21,665 ($121,665 – $100,000), investing the money at 4 percent is probably the wiser option.
Present value of a single sum
Computing the future value of a sum results in a larger amount than what you started with. The opposite is true when figuring the present value of a single dollar amount. In this case, you start with a smaller figure that, through the magic of compound interest, grows into a larger amount.
Say that a company wants to figure out how much it needs to invest today at 5 percent to have $200,000 three years from now. Following is a partial present value of a single sum table.
For this calculation, you find the factor at the intersection of 5 percent and three periods, which is .86384. Multiply $200,000 times .86384 to see how much the company has to invest today to have $200,000 in the future. The answer to that weighty question is $172,768 ($200,000 x .86384).
Accounting Glossary
accounting equation
The equation Assets = Liabilities + Equity, which demonstrates the two-sided nature of accounting and is useful for explaining the concept of double-entry accounting (or double-entry bookkeeping).
Accounting Glossary
accounting period
The time period for which financial information is being tracked in a business, such as monthly, quarterly, or annually.
Accounting Glossary
accounts receivable
An account that records the amounts that customers owe to a business.
Accounting Glossary
adjusting entry
A correction made to a bookkeeping account that adjusts for accounting errors or other necessary changes at the end of the accounting period.
Accounting Glossary
cash flows
Used to describe the source or sources of cash or how cash is used.
Accounting Glossary
Chart of Accounts
A list of all the accounts used by a business, including what types of transactions go into each account.
Accounting Glossary
debit
An accounting entry that increases an asset or expense account, and decreases a liability or income account.
Accounting Glossary
dividends
A portion of a company’s profits paid by share of common stock on a quarterly or annual basis.
Accounting Glossary
FASB
Financial Accounting Standards Board. FASB is the highest-ranking authority in the private (non-government) sector of the U.S. for making pronouncements on GAAP and for keeping accounting standards up-to-date.
Accounting Glossary
Federal Unemployment Tax
In the U.S., the fund that used to be known simply as Unemployment. Employers contribute to the fund, and states also collect taxes to fill their unemployment fund reserves. (The acronym FUTA means Federal Unemployment Tax Act.)
Accounting Glossary
fidelity bonds
A type of insurance — typically carried by employers for their employees — that helps guard against theft and reduce the risk of loss.
Accounting Glossary
FIFO
First-in, first-out. A method for costs of goods sold in which a business charges out product costs to cost of goods sold expense in the chronological order in which the goods were acquired.
Accounting Glossary
fungible
Describes a product that is interchangeable and virtually indistinguishable from another product.
Accounting Glossary
General Ledger
A summary of all of a business’s accounts and transactions.
Accounting Glossary
IASB
International Accounting Standards Board. The IASB (based in London) is the main authoritative accounting standards setter outside the U.S.
Accounting Glossary
Journals
The location in which bookkeepers keep records (in chronological order) of daily company transactions.
Accounting Glossary
LIFO
Last-in, first-out. A method for costs of goods sold that selects the last item you purchased first, and then works backward until you have the total cost for the total number of units sold during the period.
Accounting Glossary
LLP
Limited liability partnership. A legal structure that state laws offer to qualified professionals in which all the partners have limited liability.
Accounting Glossary
PC
Professional corporation. A legal structure that state laws offer to qualified professionals who otherwise would have to operate as an unlimited partnership liability.
Accounting Glossary
petty cash
A cash account that businesses keep on hand for unexpected expenses.
Accounting Glossary
revenue
Monies that are collected in the process of selling a company’s goods and services.
Accounting Glossary
salvage value
The amount that an asset is worth after it has been fully depreciated.
Accounting Glossary
statement of cash flows
A financial statement that summarizes a business’s cash inflows and outflows during an accounting period.
Accounting Glossary
transactions
Economic exchanges between a business or other entity and the parties with which the entity interacts and makes deals.
Accounting Glossary
worker’s compensation insurance
A type of insurance carried by employers that covers its employees in case they are injured on the job.
