 Hello, in this lecture, we will define annuity support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by Category further broken out by course each course then organized in a logical Reasonable fashion making it much more easy to find what you need than can be done on a YouTube page We also include added resources such as Excel practice problems PDF files and more Like QuickBooks backup files win applicable So once again click the link below for a free month membership to our website and all the content on it according to fundamental accounting principles wild 22nd edition the definition of annuity is series of equal payments at equal intervals There are different situations where we would have an annuity a series of payments We could have something like an insurance policy where they're trying to figure out How many equal payments would be there for something like life insurance? We often run into annuity payments when we're thinking about Loans we could set up a loan set up in such a way that we have equal payments a similar structure that we have when we have a mortgage loan and It's helpful to see the annuity table when we have a situation such as this and The annuity table will help to give us that time value of money It'll help us to break out principle payments and interest payments. Let's take a look at an example We're gonna assume that we're gonna get a loan from the bank We're gonna get a loan in a similar structure as a mortgage in that we're gonna have equal payments throughout The loan and some of those payments will be for interest some principle But the payment amount will be the same each time each month. We're gonna have a loan of a hundred thousand We're gonna have a 12-month loan to make it simple So we're only gonna have 12 months we're not gonna go out 30 years or anything and then we're gonna have the interest rate at five percent and We're gonna say the payments amount then we would calculate the payment amount and if you're looking at a loan amount or Looking at a loan agreement, whether it be a car loan or a mortgage They'll generally calculate the payment amount given a computer system Excel or just a Financial calculator saying the payment will be in this case 8561 it's helpful. However to look at the annuity table as well We know from this series that the agreement in this case is that we have the hundred thousand loan that we are getting And we're gonna pay back 8561 for 12 months So if we just work out the math on that we could say okay if we're gonna get a hundred thousand and we're gonna pay back 8561 twelve times Then we're gonna pay 102 732 back and we all originally got 100 Therefore the 2732 is gonna be the interest portion However, it's also helpful to see that how much of an interest portion is in each particular Payments because the portion of interest in this type of loan is gonna differ as the loan Progresses forward for example, if we have an annuity table set up something like this We said the first payment is gonna be that 8561 we can then calculate the interest how we're gonna take the principal amount in this case the 100,000 times the five percent which is point zero five that would give us interest for a year I need interest for a month So I'm gonna divide that by 12 and that'll give us approximately this for 17 That means that if we had the payment of eight five six one minus the four one seven principal amount would be this 8144 the amount remaining then Outstanding is the 100,000 minus the eight one four four given us amount remaining principal balance after the first payment of 91856 then we can go on like this we can say the second payment is going to be the same However, the amount of interest is going to differ why because now our principal has now changed So our principal is now this 91856 Times the point zero five five percent that would be for a year dividing by 12 12 months in the year giving us approximately 383 and Then if we subtract this out the eight five six one minus three eighty three the principal changes as well from the prior Payments therefore the payments the same but the interest and principal will differ Due to the fact that the principal is going down Interest being the loan on the principal then also goes down and now we would be at the eight three six seven eight That being the 91856 minus the principal portion Bringing us to this balance if we repeat to this process process twelve times We can see that we would finally get down to zero at the end of this process And it gives us a lot more information if we're looking at something like a 30 year out loan It's helpful to know in year one how much interest will we be paying as opposed to principal? Even though the main the payments are the same interest being deductible at least for taxes in that case The principal not to be indiductible