360 Day Year In Interest Expense
I was approached by a client asking me why does your bank use 360 days instead of 365 days when calculating the interest payment of a loan.
I told him it's some sort of a convention, but he wasn't fully convinced.
I looked up Wikipedia, but it doesn't provide much detail.
Why 360 Days Instead of 365 Day?
The simple answer is that 360 days is used because of its simplicity.
User @whateverittakes", a private equity associate, shared the simple explanation:
whateverittakes - Private Equity AssociateFolks didn't have calculators back in the day. Much easier to use "round numbers," so "360 days in a year and 30 days in a month" became the convention of choice. It stuck.
alexpasch - Corporate Strategy DirectorThere's actually many different ways. 360 days is used because it's far simpler. 30/360 is the best method in my opinion because of how you can divide up payment frequencies and because you don't have to count the actual number of days between dates.
You can learn more about this concept with the below video.
Read More About Interest Expense on WSO
- How Does Interest Expense Run Through The Balance Sheets?
- Why Does I Expense Show Up On The IS But Not The CFS?
- Interview Question - PIK Interest Accounting
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Folks didn't have calculators back in the day. Much easier to use "round numbers," so "360 days in a year and 30 days in a month" became the convention of choice. It stuck.
There's actually many different ways. 360 days is used because it's far simpler. 30/360 is the best method imo because of how you can divide up payment frequencies and because you don't have to count the actual number of days between dates.
How can you say wikipedia does not provide much detail? How much more detail do you want? lol (see below, maybe you went to a wrong link?)
http://en.wikipedia.org/wiki/Day_count_convention
It's a normalized number, a la 30.25 days per year. Pretty straight forward, sorry your clients an idiot.
30.25 days per year eh?
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