Account Current with the help of:
by 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.