Tag: Financial Management

i) Where amount is lent in one installment

Procedure for calculation of Average Due Date when lending in lump sum but repayment in installments, is as follows:

1. The basic day is the lending date. Calculate the number of days (or months or years) from the date of lending to the date of each payment.
2. Find out the total number of days/months/years as calculated above.
3. Divide the total as calculated by number of installments to repay the loan.
4. Add the result (obtained above) to the date of loan to get Average Due Date.

Average due Date = Date of Loan + [Total number of days/months/years calculated from the date of loan to the repayment of installments / installments]

ii) Where amount is lent in various installments

1. Take any convenient date (preferably the first due date) as the Starting Point or Zero Date or Start Date or Focal Date or Base Date.
2. Count the number of days of each transaction from the base date.
3. Multiply the amount of each transaction with the number of days thus calculated.
4. Add all the products so obtained.
5. Add the amount of all transactions.
6. Divide the total products by total amount (of all items)
7. The result of is the number of days by which average due date is away from the Base Date

iii) Taking Grace Days into account

iv) Calculation of Due Date few months after date / Sight.

Average Due Date is the date on which several debts due on different dates can be paid by a single payment without any loss of interest either to debtor or creditor. Average Due Date or Equated Due Date is the arithmetic average of several due dates.

When a person owes various amounts on different dates to another person, it may be desired to discharge the debts on a single date by a lump sum payment without any loss of interest to either party.

Such an equated date of payment is called the Average Due Date. The application of the average due date comes into use in settlement of accounts, such as, Bill transactions, payment of credit transactions, calculation of interest on drawings by part­ners etc.

The concept of Average due date (ADD) is generally used in the following situations:

• For settling accounts between principle and agent.
• Calculating interest on drawings of partners.
• For settling contra accounts e.g. where parties sell goods to each other.
• Making lump sum payment against various bills drawn on different dates with different due dates.

Average due Date = Base date ± [Total of the products / Total of the amounts]

Points to Remember for Calculation:

• Base date/ zero date may be taken as the due date of the first transaction or the due date of the last transaction or any other due date between the first and the last but preferably an earlier due date may be taken.
• While calculating the number of days always ignore the first day and include the last day.
• If the due date is in the fraction, round it off.
• If the amount is paid before the due date, a rebate is given. While, where the amount is paid after the due date, then interest will be charged.
• Due date: Due date means the date on which the amount becomes payable.
• Maturity date: Always calculate the Maturity date after taking into consideration three days of Grace. Calculation of Due Date when there is a Holiday on maturity day, due date is the next preceding working or business day.

Uses

• The settlement of accounts by a series of bills of exchange due on different dates.
• Problems relating to the calculation of interest on drawings by partners, on different dates.
• The settlement of accounts between one trader and another or a trader and his customers.

i) Interest table

This method is also known as Individual Method. According to this method, we arrange all the transactions in the form of a ledger account. There are two more columns on both the sides of the account. One column represents the number of days counted from the due date of each transaction to the date of rendering the account. In the absence of the due date of payment, we assume the date of the transactions to be the due date. While the other column represents interest.

With the help of these tables, calculate the interest due on different amounts at given rates for different periods of time and enter it against each item. Total the interest columns of both sides. The difference is the balance.

ii) By Means of Product.

This method is also known as the Product Method. In this method, the way of preparing the Account Current is the same. Only the method of calculating interest is different.

In the previous method, we prepare interest column on both the sides of the Account Current and take interest in respect of each item from the interest tables. In this method, in place of the interest columns, we prepare “product” columns.

The product, in this case, is the amount multiplied with the number of days for which it has been outstanding.  In other words, with a view to converting the period of each transaction to one day, we multiply the amount by the number of days. Thus, we enter the resultant product against each transaction of the product column. The remaining steps are given as follows:

• Find out the balance of the products on both sides.
• Calculate interest at the prescribed rate on the balance of the products for a single day.
• Enter interest on that side in the amount column on which the balance of products appears.

Method of Computing the numbers of Days

Generally, we use the following two methods for calculating the number of days:

Backward ( Epoque Method):  In this method, the number of the days are calculated from the opening date of account to the due date of the transaction.

Forward Method: In this method, the number of days is calculated from the due date of the transaction to the date of closing the account.

Red–Ink Interest: If the due date of a bill is after the date of closing the account, then we charge no interest for that. However, we write the interest from the date of closing to the due date in “Red-Ink” in the relevant side of the ‘Account current’. This interest is known as Red-Ink interest. Thus, we always treat Red-ink interest as negative interest.