Accrual rate definition

What is an Accrual Rate in Finance?

Accrual rate is the percentage interest rate applied to the remaining principal on a loan. The concept is used to determine the amount of interest expense accrued between interest payments. The accrual rate is commonly used on bonds, since these financial instruments usually only pay interest at intervals of once every six months, and the interest expense must be determined during the intervening periods.

Example of an Accrual Rate in Finance

As an example of an accrual rate, a bond has just paid interest for the six months ended June 30. The controller of the issuer needs to accrue interest expense for the month of July, and so uses an accrual rate of 8% to calculate the interest expense for this additional period.

What is an Accrual Rate in Human Resources?

The accrual rate term is also used in human resources, where it is applied to the calculation of accrued vacation time. For example, an employee manual states that employees earn vacation time at a rate of three hours per 100 hours worked. The rate at which vacation time is earned is called an accrual rate.

What is an Accrual Rate in Pension Accounting?

An accrual rate in pension accounting is the rate at which a participant earns benefits under a defined benefit pension plan. It is a key component in calculating the annual pension benefit that a participant is entitled to based on their service and salary history. The accrual rate is typically expressed as a percentage of the employee's earnings, multiplied by the number of years of service.