AVERAGE DUE DATE AND ACCOUNT CURRENT

LESSON – 4
AVERAGE DUE DATE AND ACCOUNT CURRENT
OBJECTIVES
After going through this chapter, you should be able to
• understand the meaning of Average Due Date and uses
• know the calculation of average due date and interest
• understand the meaning of Account current
• know the methods of calculation of interest

STRUCTURE
Definition of Average Due Date
Utility of Average Due Date
Steps to calculate Average Due Date
Calculation of Interest by Average Due Date Method.
Average Due Date and Account Current
Calculation of Interest
Forward Method
Product Method
Periodical Balance Method
Unit Questions
4.1. DEFINITION OF AVERAGE DUE DATE
Average due date is that date on which a person can pay all the amounts due to others without loss or gain of interest. If the sum is paid early, the person making the payment loses interest but the other party gains. But a date can be arrived at on which all payment can be made so that no party loses or gains by way of interest . Such a date is known as “Average Due Date”

Where a person, owing several debits due on different dates, wants to pay the total amount due on one specified date, the date must be such that neither the debtor nor the creditor losses anything by way of interest, i.e , the total payment in lieu of several payments must be made on the average due date. Usually, the sum total of all the separate individual payments is the consolidated amount to be paid. Average due date is important because calculation of such a date, where there is no loss to either party.
4.2. UTILITY Of AVERAGE DUE DATE
The average due date is very useful in the settlement of following types of accounts.
Accounts which are to settled by way of series of bills.
To calculate the interest on the drawings of partners from the firm.
In the event of dissolution of partnership, when assets are realized on piecemeal basis.
4.3. STEPS TO CALCULATE AVERAGE DUE DATE
The following steps are involved in calculating the average due date
Fixing any one date (preferably on of the due dates) as a base date, which is also called as ‘zero date’ start date’ or focal date. If is always better to take the due date of first transaction as the start date. It must be the due date of the transaction and not the date of transaction.
Calculating the number of days between the base date and the due date of the transaction.
Multiplying each amount by the number of days so calculated.
Totaling the various products and the amount of various transactions.
Dividing the total of products by the total of amount. The result will be the number of days between the base date and the average due date.
Calculating the date by counting the number of days from the base date so chosen. This will give an average due dated Thus, the following formula is used for calculating the average due date.
Average Due Date = Base Date + or - Total of Products
------------------------------
Total of Amounts

If the last due date is taken as the base date, the result will show the number of days to be deducted from the base date to arrive at the average due date.

If intermediate date is taken as the base date, find out the difference between the products of the previous and subsequent transactions to the base date. The average due date will be prior to the base date if the products above the starting transaction are greater, the average due date will be subsequent to the base date, if the products below the starting transaction are greater. One –half or a day or over is taken as another day and fractions under one-half is neglected.

Example – 2
Two traders, Guru lal and Charu Lal, buy goods from one another, each allowing the other one month’s credit. At the end of three months, the accounts rendered are as follows:
Gods sold by Guru Lal Goods sold by Charu lal
to Charu Lal toGuru Lal
April 15 Rs.12,000 April 20 Rs.10,400
May 12 Rs.14,000 May 21 Rs.10,000
June 13 Rs.16,000
Calculate the date upon the balance should be paid so that no interest is due either to Guru Lal and Charu Lal
Solution:
Taking May 15 as base date
1. For Charu Lal’s Payments:
Date of Transaction Due Date Rs. No.of days from base date Products
April 15
May 12
June 13

Amount due to Guru Lal.
May15
June 12
July 13
12,000
14,000
16,000


42,000 0
28(13+15)
59(13+30+16)
0
3,92,000
9,44,000


13,36,000

2.For Guru Lal’s Payment (The Same base date,i.e may 15 should be taken
Date of Transaction Due Date Rs. No.of days from base date Products
April 20
May 21

Amount due to Guru Lal.
May15
June 21

10,400
10,000


20,400 5
37(16+21)

52,000
3,70,000


4,22,000

Excess of Charu Lal’s products over Guru Lal’s = 13,36,000 – 4,22,000
= 9,14,000
Balance due to Guru Lal = Rs.42,000 –Rs.20,400
= Rs. 21,600.
Number of days from the base date to the date of settlement is
= 9,14,000
--------------- =42.31days
21,600
= 42 days
The date of settlement of the balance is 42 days after May 15 ie.e.June26.Hence , on June26,Charu Lal must pay Rs.21,600
4.4. Calculation of Interest by Average Due Date Method.
In Average Due Date, if payment is made on that date itself, no interest becomes due. If payment is made after the average due date, interest is calculated for the number of days from the average due date to the actual settlement date.

Example – 3
Sumathi owes Viji Rs.950 on Jan.1,1998 . Following transaction take place between theme
Jan.16 Sumathi buys goods Rs.1,500
Feb. 02 Sumathi receives cash loan Rs.2,000
Mar. 05 Sumathi buys goods Rs.1,800
Sumathi pays the whole amount on 31st March,1998 together with the interest @5% P.a . Calculate interest by the average due date method.
Solution
Taking January I as the base date:
Due Date Rs. No.of days from Jan,1 Products
Jan.1
Jan.16
Feb.2
Mar.5 950
1,500
2,000
1,800

6,250 0
15
32
63 0
22,500
64,000
1,13,400

1,99,900
Average Due Date = Base Date + Total of Products
-------------------------
Total of Amount
= Jan.1 + 1,99,900
---------------
6,250
=Jan.1 + 31.98
=Jan.1 + 32days
= Feb.2.
4.5. Average Due Date and Account Current
Interest , therefore , is to be calculated on Rs.6,250 from Feb.2 to March 31 @5%
Interest = Rs.6,250 x 58 x 5
365 x100
=Rs. 49.66.
Example :4
Mr. X Sells goods to Mr.Y as follows:
Jan .2.Rs.1,000,February 16 Rs.700;March 22Rs.840
Mr.Y sells goods to Mr.X as follows:
Jan.21 Rs.500; March 8 Rs.944 ;April 15Rs.340.
The agree to settle the amount on the average due date method. Terms are ;Mr.X’s bills at 2 months and Mr.y’s bills at one month . Find out the due date and the amount to be paid.
Mr.Y in Account Current with Mr.X
(Taking Feb.24 as the base date)
Date Particulars Due
Date Rs. Days Products Date Particulars Due
Date Rs. Days Products
Jan.2
Feb.16
Mar.22 To Sales
To Sales
To Sales Mar.5
Apr.19
May.25 1,000
700
840

2,540 9
54
90 9,000
37.800
75,600

1,22,400 Jan.21
Mar.8
Apr.15 By Purchases
By Purchases
By Purchases
By Balance c/d



Feb.24
Apr.11
May.18 500
944
340
756
2,540 0
46
83 0
43,424
28,220
50,756
1,22,400

Average Due Date = Feb.24 + 50,756
---------------
756
= Feb.24 + 67 days
On May 2, Mr.Y should Pay Rs. 756 to Mr.X.
Introduction (Account Current)
An Account Current is a statement in debit and credit form recording the transactions between two person in chronological order i.e.it is a statement in the form of an account with debit and credit columns, recording the transactions between two persons or businesses in the order of dates, interest being charged and allowed on each item at an agreed rate or rates. It usually arises in consignment and Joint venture dealings.





The name of the person who is rendering the account is last named in the heading of the account. Thus “ A in Account Current with B” would signify that B is rendering the account to A. It is really a copy of A’s A/c in B’s books.

The proforma of an Account Current is given below:
A in Account Current with B
(Interest to 31st March @ 5% p.a)

Date Particulars Amount
Dr. Days Products Date Particulars Amount
Cr. Days Products






4.6. Calculation of Interest
There are three methods of calculating interest for account current purposes. They are
1. Forward Method; 2. Product Method; and 3.Steps or Periodic Balance Method.
4.6.1. Forward Method
Under this method, each transaction is treated separately and interest is calculated for each item by counting the number of days from the date of transaction to the date of settlement. The interest in debited, if interest charged is more than the interest receivable and credited if interest receivable is more than the interest charged. This method is , however, cumbersome, since interest has to be calculated for each item separately.

Example:
On 1st October 1995, Karuna owes Guna Rs.10,000
On 1st December 1995, Karuna pays cash Rs.3,000
On 1st January 1996 Karuna purchases goods from Guna Rs.6,000
On 1st February 1996 karuna pays cash Rs, 9,000
Prepare Account Current rendered by Guna to Karuna for the half year ending 31st March 1996, calculating interest @ 15 % p.a.
Karuna in Account Current with Guna
(Interest to 31st March 1996 at 15% p.a)
Date Particulars Months Interest Rs. Date Particulars Months Interest Rs.
1995
Oct.11996
Jan.1





1996 Apr.1




To Balance b/d
To Sales
To Interest





To Balance b/d
6
3
750
225




975

10,000
6,000
600



16,600

4,600 1995
Dec.1.1996
Feb.1
Mar.31

Mar.31
By Cash
By Cash
By Balance of Interest

By Balance c/d


4
2
---

---
150
225
600



975


3,000
9,000


4,600

16,600
4.6.2. Product Method
This method is a modification over the previous method. Interest under this method will be calculated for one day on the product of amount and days, for one month on the product of amount and months, for one year on the product of amount and years as the case may be . In calculation days, the date of transactions is ignored. But if it is the date of the previous balance brought forward from the previous period, the opening date must be included. The products so obtained must be recorded in the products columns and balance of products is found out in the normal way. Interest is calculated on the balance of the products and interest is entered in the amount column on the side which has the highest of the total products After this, the account is balanced and it is carried forward to the next accounting period.
Example:
Make out an account current to ber rendered by Muthu to Velu on 30th September 1998 in respect of the following transactions appearing in the book of Muthus.
1998 Rs.
July 1 Debit Balance b/fd 1,350
July 5 Sold goods to Velu 900
July 15 Received Cash from Velu 1,350
Aug.4 Velu purchased goods 1,920
Aug.15 Received Cash from Velu 900
Sept 1 Bought goods from Velu 2,100
Sept 1 paid cash to Velu 750
Sept 12 Sold goods to Velu 960
Sept.15 paid cash to Velu 600
Interest to be taken into account at 15% p.a Calculate to nearest rupee, according to Product Method.

Solution
Velu in Account Current with Muthu
(Interest to 30th September @ 15 % p.a)

Date Particulars Rs Days Products Date Particulars Rs. Days Products
1998
Jul.1
Jul.5
Aug.4
Sep.1
Sep.12
Sep.15
Sep.30


Oct.1

To Balance To Sales
To Sales
To Cash
To Sales
To Cash
To Interest


To Balance b/d
1,350
900
1,920
750
960
600
63*
6,543

2,193
92
87
57
29
18
15




1,24,200
78,300
1,09,440
21,750
17,280
9,000



1,53,720 1998
Jul.15
Aug.15
Sept.1
Sept.30

By Cash
By Cash
By Purchases
By Balance c/d
1,350
900
2,100
2,193



6,543

77
46
29






1,03,950
41,400
60,900
1,53,720



3,59,970

*Interest = Balance of Products x Rate of Interest
------------------------------------------------
365x 100
15 1
= 153720 x x
100 365
Red Ink Interest

Some times the due date of the transaction falls beyond the date of settlement i.e.the date on which account current is prepared . In such a case, days are counted from the date of settlement to the date of transaction and entered in the days column with(-) sign. The product of this is also marked with (-) sign. This is called Red Ink Interest because in books it is written in red int. Some times. To avoid risk the red ink interest is entered on the opposite side.

Example :

The following are the transactions that took place between sugan and Arvind during the half year ended 30th June 1998: Rs.
Balance due to Sugan by Arvind on 1st January 6,000


Goods sold by Sugan to Arvind on Jaunuary 8,800
Goods Purchased by Sugan from Arvind on February 16 12,800
Goods Returned by Sugan to Arvind on February 18
(out of purchases of February 16) 1,000
Goods Sold by Arvind to Sugan on March 24 7,000
Bills accepted by Sugan at 3 Months on April 22 3,000
Cash paid by Sugan to Arvind on April 29 5,000
Goods sold by Sugan to Arvind on May 17 5,400
Goods sold by Arvind to Sugan on June 22 6,000

Draw up an account current to be rendered by Arvind to Sugan charging interest @20% p.a.

Solution:
Sugan in Account Current with Arvind
(Interest to 30th June 1998 @ 20% p.a)
Date Particulars Rs Days Products Date Particulars Rs. Days Products
1998
Feb.16
Mar.24
Jun.22
Jun.30 To Sales

To Sales
To Sales
To Balance of Products
12,800
7,000
6,000

3,823

29,623
134
98
8
17,15,200
6,86,000
48,000

7,72,600


32,21,800 1998
Jan.1
Jan.7
Apr.22

Apr.29
May.17
Jun.30

By Balance
By Purchases
By B/R(due on July 25)
By Cash
By Purchase
By Interest*

6,000
8,800

3,000
5,000
5,400
423
29,623
181
174

-25
62
44
-
10,86,000
15,31,200

-75,000
3,10,000
2,37,600
-
32,21,800

20 1
*Interest = 7,72,600 x x = Rs. 423
100 365

4.6.3. Periodical Balance Method.

This is also known as Steps Method, which is more suited for calculation of interest in bank account, where balance of account is taken out after every transaction. Every balance is multiplied by the number of days for which it remains unchanged. The debit or credit products for each transaction are recorded in the columns provided for the purpose. The product columns are balanced at the end of the period and the interest calculation on it is entered in the amount column on the side which has the larger total of products. This method is almost similar to

products method. Days of each transaction are counted from due date to the date of next transaction. If interest is payable to the party it will be entered as “By Interest” and if it is due from the party, it will be entered as “To Interest”

If the rate of interest differs for debit and credit balances, interest chargeable and payable must be calculated on the debit and credit products separately and net interest is entered on the appropriate side.

Example:

On 4th January 1996 , Senthil opened a current account in the lakshmi Vilas Bank Ltd, and deposited Rs.15,000. His further deposits are given below.

20th January 9,000
10th March 15,000
12th May 10,500
His withdrawals are
14th February 12,000
15th April 30,000
10th June 6,000
Prepare the account current in the books of the Bank as on30th June 1996. Calculate interest at 15% on the debit balances and 12% on credit balances.
Date Particulars Deposits With drawls Dr/Cr Balance Day Products
Debit Credit
1990
Jan.4
Jan.20
Feb.14
Mar.10
Apr.15
May.12
Jun.10

Jun.30










Jul.1
By Cash
By Cash
To Cheque
By Cash
To Cheque
By Cash
To Cheque

(On Rs.2359500@12% for 1 day Rs.775.72

On Rs.81000@15% for 1 day Rs.33.28)
To Balance c/d




By Balance b/d
15,000
9,000
---
15,000
--
10,500
----









50,242.44


2,242.44


12,000
--
30,000

6,000







2,242.44

50,242.44




Cr
Cr.
Cr

Dr.
Cr.
Cr







Cr.




Cr.
15,000
24,000
12,000
27,000
3,000
7,500
1,500







2,242.44




2,242.44
16
25
25
36
27
29
20
--- 2,40,000
--- 6,00,000
--- 3,00,000
--- 9,72,000
81,000 ---
---- 2,17,500
--- 30,000








81,000 23,59,500



*Interest Calculation on :
1. Interest Rs.775.72
12 1
*Interest = 775.72 x x
100 365
Interest Rs. 33.28

81000x15x1
--------------
100x365

Balance of interest payable = 775.72 – 33.28
= Rs.742.44
Unit Questions

1. What is Average Due Date?
2. What is an Account Current
3. How do you calculate average due date?
4. What are the uses of average due date?
5. What is red ink Interest?
6. Make out an account current to be submitted by A to B on 30.6.1989 in respect of the following transactions in the books of A.
1989 Rs.
Jan.1 A sells goods to B 1,000
Jan.15 B sells goods to A 800
Feb.4 A. Sells goods to B 500
Feb.23 B pays cash to A 200
Mar.5 A sends his acceptance at on month 600
Apr.10 B sells goods to A 400
May.5 A pay cash to B 300
May.10 B sends his acceptance at one month 200
Interest to be taken into account at 10% p.a.

7. A partner has withdrawn the following sums of money during the half year ended June 30, 1984
10.1.1984 Rs. 2000
18.2.1984 Rs. 1200
5.3.1984 Rs. 600
12.4.1984 Rs. 800
21.5.1984 Rs. 1000
Rs. 600
Find out the Average Due date and calculate the interest to be charged at the rate of 10% for the half year ended 30.6.1984.

8. A had the following transactions with B:
1990 Rs.
January 1 Balance due from B 1,000
February 16 Purchased goods from B 6,000
February 28 Sold goods to B 10,000
March 16 Received a cheque from B 3,000
April 20 sold goods to B(invoice on May3) 10.000
June 16 Purchased goods from B
(Received on July 16) 15,000
Sep. 23 Paid cash to B 3,000
October 24 Accepted B’sbill for 3 Month 5,000
November 26 Received B. acceptance for 2 month 8,000
Prepare an account current with necessary columns of B completed up to December 31,1990 as will appear in the books of A reckoning 5 % interest on the balance due ,using Product Method.