What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Accounting Rules to Calculate Return on Investments

Original post by Cindy Quarters of Demand Media

It is important to know whether your investments are making money.

Determining the return on an investment -- the ROI -- is an important part of having an investment portfolio. Knowing the ROI allows an investor to decide whether she is making the best use of her investment funds. There are different ways to calculate return on investment, and various factors to consider.

Contents

ROI Basics

The return on investment is calculated based on various factors, and it is expressed as a percentage. This makes it possible to accurately compare different types of investments. To get the most accurate picture of the true ROI, it is important to factor in all costs. However, for a quick glimpse at how investments are doing, the details can be overlooked to focus on the big picture.

Simple ROI

The simple ROI is the most basic method of determining the return on an investment. To calculate a simple ROI, take the amount the investment has gained in value, subtract the cost of the investment, then divide that number by the cost in order to come up with the ROI. The accounting formula for this method is written like this: ROI = (GV-C)/C. GV represents the gain in value and C is the investment cost.

Annual ROI

A calculation for annual return on investment is done slightly differently than simple ROI, to determine how well the investment has performed during the year. It is similar to the simple ROI, but it looks at a different set of numbers. The value of the investment at the beginning of the year -- BYV -- is subtracted from the value of the investment at the end of the year -- EYV. Any dividends -- D -- are added to the total. The resulting number is then divided by the value from the beginning of the year. The formula for this is ROI = [(EYV-BYV) + D] / BYV.

Considerations

Although following some simple accounting rules helps determine the overall return on investment, some other important factors also affect the investment's value. Such things as taxes, insurance and trading fees all reduce the ROI and should be accounted for by deducting them from the value of the investment. These costs can be significant, and they should not be overlooked when determining the true return on an investment.


                   

References

About the Author

Cindy Quarters has been writing professionally since 1984, creating both user manuals and training documentation. She also writes travel, pet and gardening articles, with work published in "Radiance Magazine" and the "AKC Gazette." Quarters earned a Bachelor of Arts in English from Washington State University, as well as a master's degree in management information systems from West Coast University.

Photo Credits

  • Photos.com/Photos.com/Getty Images


Advertisement