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imputed interest means interest that has not been actually paid but assumes to be paid…..
hi begum if u are not satisfied with the explanation u can search it in google.Yes I realise the basic explanation for it but why is it done so? When you havent paid interest, why would you want to assume that you did? This is what I dont understand. I kind of understand from lenders point of view as for example, they may be charged tax on that. But I dont understand from borrowers point of view.
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Hi Begum,
Thinkig abou the calculation for Residual Income nd what it istryig to show I guess it is very important for the borowers decision making. residual ncome calculation is attemptin to work out the profit taking into consieration the COST OF THE FUNDS. Imputed interest is suposed to represen he cost ofthose funds.I hope ths helps 🙂
Donnamaree
The point about RI is that it is a way of measuring the performance of a division.
We need to relate the profit to the amount invested (i.e. if there is more investment then there needs to be more profit!!).
The most obvious way is Return on Investment (profit as a percentage of amount invested).
Residual Income is an alternative way. The reason is the interested is only imputed (or ‘pretend’) is that it is only there as a calculation of how well the division has performed. It does not appear in the accounts anywhere.
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