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What is annualizing?

Author:
Harold Averkamp, CPA, MBA

Definition of Annualizing

Annualizing means taking a partial year amount and converting it to a full year amount. We will use several examples to illustrate how this works.

Examples of Annualizing

  • A person having a monthly salary of $4,000 is earning an annualized salary of $48,000 ($4,000 per month multiplied times 12 months in a year).
  • A person with a semimonthly salary of $3,000 is earning an annualized salary of $72,000 ($3,000 multiplied times 24 semimonthly pay periods).
  • A company having to pay an interest charge of 1.5% per month on its unpaid bills is experiencing an annualized interest rate of 18% (1.5% per month multiplied times 12 months).
  • A vendor’s invoice having an early payment discount of “1/10, net 30” means that 1% can be saved if the amount owed is remitted within 10 days instead of the required 30 days. This 1% savings for paying 20 days early can be annualized by multiplying both the 1% and the 20 days by “18” to arrive at an annualized rate of approximately 18%.
  • A vendor’s invoice having an early payment discount of “2/10, net 30” means that 2% can be saved if the amount is remitted within 10 days instead of the required 30 days. This 2% savings for paying 20 days early can be annualized by multiplying both the 2% and the 20 days by “18” to arrive at the annualized rate of approximately 36%. An annualized interest rate of 36% for a “riskless investment” of the amount owed is an amazing opportunity (as is an annualized rate of 18%). It also indicates that a company without sufficient cash to pay within the early payment discount period will experience a huge opportunity cost.
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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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