When a merchant makes out a promissory note of, say, $1,000 due 90 days after date, and discounts it at his bank, the bank usually deducts interest at, say, 6%, from the face of the note; i.e., the merchant is credited not for the full $1,000 but only for $985, and when the note matures he either pays the amount, $1,000, or his account is debited with it. The $15 is called “discount” because it is “subtracted” from the face of the note; but since this item is paid for the use of the amount loaned by the bank, it is of the same nature as interest. There is no reason, therefore, for keeping two separate ledger accounts, one for discount and one for interest paid, the two usually being combined under one title, “Interest and Discount” or “Interest.”
Principles to be Observed in the Calculation of Interest.—In connection with interest computations it is important to observe the following points, the principles involved in each case being best explained by making use of suitable illustrations.
1. In commercial practice, when the interest period is expressed in months, the interest for each month is one-twelfth of the annual interest, i.e., a note for $1,000 dated April 11, 19—, due “three months from date,” matures July 11 and the interest at 6% is 6% of $1,000 divided by 12 multiplied by 3, or
| $1,000 × .06 × 3 | |
| ————— | = $15 |
| 12 |
2. Were the same note worded “ninety days from date,” it would mature July 10 instead of July 11, the number of intervening days being 19 in April, 31 in May, 30 in June, and 10 in July; total 90 days. The interest would amount to
| $1,000 × .06 × 90 | |
| ————— | = $15 |
| 360 |
3. If a note is dated March 6, 19—, and matures, say, on April 30, the interest period is 55 days (25 in March and 30 in April). Usually, in computing the number of days in the interest period the opening date is omitted but the closing date is included. In some instances the practice is to include both days.
It is important to note that it is almost a universal custom to use 360 as a denominator in all these cases, although the theoretically correct number is 365. This is done for the reason that the use of 360 greatly facilitates the computation. The government of the United States makes an exception to this rule and counts the year as 365 days, and disregards the month as a unit base; i.e., instead of counting the month of January as ¹/₁₂ of a year, its computation requires the use of the fraction ³¹/₃₆₅ as the multiplier. Interest on $1,000 for, say, 12 days, by this method, amounts to
| $1,000 × .06 × 12 | |
| ————— | = $1.97 |
| 365 |
instead of