Annuities

Journalising is the act of recording annuity transactions in the books of accounts. When a bank receives an annuity payment from a borrower, the entry is: Debit Cash/Bank Account (as money comes in) and Credit Loan Account (as the debt decreases). If the bank is paying an annuity to a retiree, the entry is: Debit Pension Expense Account and Credit Cash/Bank Account. Accurate record-keeping ensures that the interest component is taxed correctly and the principal is tracked.

An Annuity Due is a series of equal payments made at the very beginning of each period. Think of your mobile recharge or house rent; you pay first and then use the service. In this case, the money starts earning interest (or saving interest) immediately. Because the payments happen earlier than an ordinary annuity, the total value of an Annuity Due is always higher than an Ordinary Annuity, assuming all other factors like interest rate and amount are the same.

An Ordinary Annuity refers to a series of equal payments made at the end of each period. This is the most common form of payment in banking. For example, if you take a car loan, you usually pay the first installment one month after receiving the loan. Because the payment happens at the end of the time gap, it is called 'Ordinary'. In accounting, interest is usually calculated on the balance before the payment is made. It is the standard method for most corporate bonds and consumer loans.