What is the difference between accruing and compounding? - ProProfs Discuss
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What is the difference between accruing and compounding?

Asked by D.Barlet, Last updated: Oct 13, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Accrue means the money owed to you accumulates. if it is not compounding, that means the money that is owed to you is not earning any money. There's a big difference between the following two scenarios (taxes are excluded). i) you give me $1,000 and each year Iwill place into an account 10% of your principal and will do so for 10 years.

At the end of 10 year, you will have $2,000 (your original $1,000 plus 10 years of interest that did not compound). In this case, the money I'm giving you is accruing but not compounding. ii) You give me $1,000 and Iwill give you a compounded rate of return of 10% per year for 10 years. At the end of 10 years you would receive $2,593.74. The reason why this is so much higher is that each year you earned 10% on the total amount owing, rather than just 10% on the original $1,000. In this case, the money I'm giving you is accruing and compounding.

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