Annuity in Advance
What Is Annuity in Advance?
Annuity in advance is a series of payments that are due toward the beginning of each successive time span. Rent is the classic illustration of an annuity in advance for a landlord since it is a sum of money paid toward the beginning of every month to cover the period to follow. An annuity in advance, a legal and accounting term, is likewise called an "annuity due."
Grasping Annuity in Advance
Annuity in advance has nothing to do with the financial or insurance product "annuity," regardless of the utilization of the word. One more method for depicting an annuity in advance is a series of equivalent payments that are received toward the beginning of each similarly separated period. The payment is made before a service is delivered or before a decent changes hands, so no interest is applied. It likewise means that the present value of an annuity in advance is higher than payments made later, for example, after a service is given or goods change hands.
There are three components of an annuity in advance or an annuity due:
- Every payment is in a similar amount (for instance, a series of $100 payments)
- Every single payment is made simultaneously interval (like month to month, quarterly, or yearly)
- Every single payment is made toward the beginning of the predefined time span (for instance, a payment made on the main day of every month)
Annuity in Advance versus Annuity financially past due
Something contrary to an annuity in advance is a [annuity in arrears](/annuity-financially past due) (likewise called an "ordinary annuity"). Mortgage payments are an illustration of an annuity financially past due, as they are customary, indistinguishable cash payments made toward the finish of equivalent time intervals. Like rent payments, mortgage payments are due on the first of the month. In any case, the mortgage payment covers the previous month's interest and principal on the mortgage loan.
One case where the difference between an annuity in advance and an annuity falling behind financially matters is in the valuation of income properties. On the off chance that payments are received toward the beginning of the rental period instead of toward the finish of the rental period, the current value of those payments increments. It is likewise conceivable to utilize mathematical recipes to process the present and future values of an annuity in advance or an ordinary annuity.
Since most payments are made toward the beginning of a period as opposed to toward the end, the annuity in advance (annuity due) concept is all the more regularly employed compared to the annuity falling behind financially (ordinary annuity) concept.
Annuity in Advance Example
Notwithstanding rent as the most common illustration of an annuity in advance, there are leases. For instance, assume that a company contracted for the utilization of a piece of hardware by means of a lease that required an ordinary payment of $1,000 toward the beginning of each and every month for quite some time. Such an agreement would amount to an annuity in advance since every payment is equivalent, and is made toward the beginning of each uniform interval.
- Annuity in advance is a payment due toward the beginning of each successive period.
- Loft rent is a model, as the landlord regularly anticipates payment toward the beginning of every month.
- An annuity in advance has three principal qualities: the amount of every payment is something similar, the payment schedule is ordinary intervals (week by week, month to month, quarterly), and payment is due toward the beginning of every period.
- An annuity in advance has nothing to do with the insurance product called an annuity.