How is the Average Daily Balance calculated?

The Average Daily Balance is calculated by averaging the principal balance each day during the accounting period. This method involves taking the balance of the account at the end of each day, summing these daily balances over the accounting period, and then dividing that total by the number of days in the period. This calculation provides a more accurate representation of the account’s activity and interest accrual, as it reflects the fluctuations in the balance throughout the entire period rather than just specific points in time.

This method is particularly common in interest calculations for savings accounts and is beneficial for both consumers and institutions as it allows interest to be accrued based on actual daily balances, promoting more fair compensation for account holders.