The Rule of 78s is a method for computing unearned interest used on installment loans with add-on interest. It distributes the interest charges in a way that results in higher interest expenses earlier in the loan term.
Unearned interest refers to interest that has been collected on a loan but cannot yet be counted as book earnings. This situation typically occurs with prepaid interest, which is taxable upon receipt by both cash and accrual basis taxpayers.
