What is present value?

In accounting, present value likely refers to the amount that remains after future cash amounts have been discounted to an earlier time. (The earlier time is depicted on a timeline as the point 0, which is the beginning of period 1.) The discounting process involves removing the time value of money, future interest, etc. which is contained within the future cash amounts.

Accountants will record the present value when neither the cash amount, the cash equivalent amount, nor the fair market value of an item in a transaction is known.

Accountants will also calculate a present value to determine an implicit interest rate or the effective interest rate. For example, if a bond payable with a face value of $100,000 and a stated interest rate of 8% is issued for $99,000 the accountant will seek the interest rate which will discount the future semiannual interest amounts of $40,000 and the maturity value of $100,000 to be exactly $99,000 at the time that the bonds were issued. That rate is the effective interest rate and it will be used to determine each period's interest expense and the amount of the discount on bonds payable to be amortized in each period.