GROUP - I PAPER - 1 ACCOUNTING V1 CHAPTER 7

7 AVERAGE DUE DATE AND ACCOUNT CURRENT Unit 1 : Average Due Date Learning Objectives After studying this unit, you will be able to: ♦ Understand what is average due date and how to choose 0 (zero) day for calculating average due date. ♦ Learn calculation of average due date where amount is lent in various instalments. ♦ Calculate average due date for determining interest on drawings. ♦ Familiarize with the steps involved in calculation of average due date where amount is lent in one instalment but repayment is done in various instalments. Also understand days of grace and learn the technique of maturity date by counting the days of grace. ♦ Learn the technique of calculating due date when maturity is on a holiday. 1.1 Introduction In business enterprises, a large number of receipts and payments by and from a single party may occur at different points of time. To simplify the calculation of interest involved for such transactions, the idea of average due date has been developed. In this Unit we shall elaborate the underlying principle of determining average due date covering the cases where the amount is lent in various instalments but repayment is made in a single instalment as well as where the amount is lent in one instalment but repayment is made by various instalments. The technique of average due date is also useful for calculating interest on drawings made by the proprietors or partners of a business firm at several points of time. 1.2 Types of Problems There are two types of problems: (1) Calculation of equated date when amount is lent in various instalments and repayment is made in one instalment. © The Institute of Chartered Accountants of India Accounting (2) Calculation of equated date when amount is lent in one instalment and repayment is made in various instalments. 1.2.1 Case 1. Where amount is lent in various instalments Calculation of average due date: Under this type of problem, average due date is calculated as follows : a. Take the earliest due date as starting day or base date or “O” day for convenience. Any date whatsoever, may also be taken as “O” day. b. Consider the number of days from base date up to each due date. Calculations may also be made in month. c. Multiply the number of days by the corresponding amounts. d. Add up the amount and products. e. Divide the “Product total” by “Amount total” and get result approximately upto a whole number. This number is the number of days from starting point upto the average due date. f. Count the above number of days from considering the number of days in each month involved. Thus the formula for the average due date can be under. Total of products Average due date = Base date ± Total amounts Illustration 1 The followings are the amounts due on different dates in between the same parties: Amount Due Date ` 500 3rd July 800 2nd August 1,000 11 September Suggest a date on which all the bills may be paid out without any loss of interest to either party. Solution Considering 3rd July as the starting day the following table is prepared: Due Dates Amount No. of Days from 3rd July Products 3rd July 500 0 0 2nd August 800 30 24,000 11th September 1,000 70 70,000 2,300 94,000 7.2 © The Institute of Chartered Accountants of India Average Due Date and Account Current 94,000 Average Due Date = 3rd July + 2,300 = 3rd July + 41 days = 13th August Assuming 5% is interest rate, the debtor loses interest due to early payment of ` 1,000 for 29 days (from 13th August to 11th September) i.e., ` 4. He however, gains interest, due to late payment on ` 500 for 41 days from 3rd July to 13th August and on ` 800 for 11 days i.e. ` 2.80 + ` 1.20, i.e., ` 4. Thus the debtor neither loses nor gains by payment of all the amounts on 13th August. It should be noted that in calculating the number of days only one of the dates, either the starting date or the due date is to be counted. In the same fashion bill due to one party may be cancelled as against bills of same amount due from the same party after adjustment of interest for the period elapsing between the two average due dates. Instead of payment of several bills on the same date as above, other bill starting from the average due date for agreed period together with interest for the period may be accepted. Illustration 2 Two traders X and Y buy goods from one another, each allowing the other one month’s credit. At the end of 3 months the accounts rendered are as follows : Goods sold by X to Y Goods sold by Y to X ` ` April 18 60.00 April 23 52.00 May 15 70.00 May 24 50.00 June 16 80.00 Calculate the date upon which the balance should be paid so that no interest is due either to X or Y. Solution Taking May 18th as the zero or base date : For Y’s payments : Date of Due Date Amount No. of days from Products Transactions the base date (1) (2) (3) (4) (5) April 18 May 18 60 0 0 May 15 June 15 70 28 1,960 June 16 July 16 80 59 4,720 Amount Due to X 210 Sum of products 6,680 7.3 © The Institute of Chartered Accountants of India Accounting For X’s payments The students should note that the same base date should be taken. Therefore, the base date will be May 18 in this case also. Date of Due Date Amount No. of days from Products Transactions the base date (1) (2) (3) (4) (5) April 23 May 23 52 5 260 May 24 June 24 50 37 1,850 Amount Due to 102 Total products 2,110 Y Excess of Y’s products over X’s = 6,680 – 2,110 = 4,570 Excess amount due to X ` 210 – 102 = ` 108. Number of days from the base date to the date of settlement is 4,570 = 42 days 108 Hence the date of settlement of the balance is 42 days after May 18 i.e., on June 29. On June 29, Y has to pay X ` 108 to clear the account. 1.2.2 Calculation of interest on drawings When different amounts are due on different dates, but they are ultimately settled on one day the interest may be calculated by means of Average Due Date. When interest is chargeable on drawings, and drawings are on different dates, interest may be calculated on the basis of Average Due Date of drawings determined on the above basis. Illustration 3 A and B, two partners of a firm, have drawn the following amounts from the firm in the year ending 31st March, 20...... Date A Date B ` ` 1.7 500 12.6 1,000 30.9 800 11.8 500 1.11 1,000 9.2 400 28.2 400 7.3 900 Interest at 6% p.a. is charged on all drawings. Calculate interest chargeable (assume February of 28 days) 7.4 © The Institute of Chartered Accountants of India Average Due Date and Account Current Solution (1) Ordinary System : A: 500 for 9 months = 4,500 for 1 month 800 for 6 months = 4,800 for 1 month 1,000 for 5 months = 5,000 for 1 month 400 for 1 month = 400 for 1 month 14,700 for 1 month 14,700 @ 6% for 1 month = 1/2% of 14,700 = ` 73.50 B: 1,000 for 292 days = 2,92,000 500 for 232 days = 1,16,000 400 for 50 days = 20,000 900 for 24 days = 21,600 4,49,600 6 1 4,49,600 x x = ` 73.91 100 365 (2) Average Due Date System: (a) Taking 1.7 as O - day: Dates ` Months from O-day Products 1.7 500 0 0 30.9 800 3 2,400 A : 1.11 1,000 4 4,000 28.2 400 8 3,200 2,700 9,600 9,600 A.D.D. = months from 1.7 . . . i.e., 3.556 months i.e. October 17th. 2,700 Interest is chargeable from October 17 to March 31 i.e. 5.444 months 6 5.444 2,700 x x = ` 73.49 100 12 Or, Taking 1st April as O-day: Dates ` Months from O-day Products A : 1.7 500 3 1,500 30.9 800 6 4,800 1.11 1,000 7 7,000 28.2 400 11 4,400 2,700 17,700 7.5 © The Institute of Chartered Accountants of India Accounting 17,700 A.D.D. = months from 1.4 . . . i.e. 6.556 months i.e. 17th October. 2,700 Interest is chargeable from October 17 to March 31 i.e. 5.444 months. 6 5.444 2,700 x x = ` 73.49 100 12 (b) Taking 12th June as Zero-day : Dates ` Months from O-day Products B : 12.6 1,000 0 0 11.8 500 60 30,000 9.2 400 242 96,800 7.3 900 268 2,41,200 2,800 3,68,000 3,68,000 A.D.D. = days from 12.6 . . . i.e. 131 days. 2,800 June 18 July 31 Aug. 31 Sept. 30 110 131 days -110 days i.e. 21st October So, interest is chargeable from 21.10 . . . to 31.3 . . . i.e. for 161 days. 6 161 2,800 x x = ` 74.10 100 365 The Differences in amounts in the two systems (1) and (2) are due to approximation. Illustration 4 The following amounts are due to X by Y. Y wants to pay off (a) on 18.3 ... or (b) on 14.7 ... Interest rate of 8% p.a. is taken into consideration. Due Dates ` 10.1 500 26.1 (Republic Day) 1,000 23.3 3,000 18.8 (Sunday) 4,000 Determine the amount to be paid in (a) and in (b). 7.6 © The Institute of Chartered Accountants of India Average Due Date and Account Current Solution Due Date Due Date No. of days Amount Product (Normal) (Actual) from 10.1 . . . ` taking as 0-Day 10.1 10.1 0 500 0 26.1 25.1 15 1,000 15,000 23.3 23.3 72 3,000 2,16,000 18.8 17.8 219 4,000 8,76,000 8,500 11,07,000 11,07,000 A.D.D. = 10th Jan. + = 10th Jan + 130 days = 20th May 8,500 January 21 February 28 March 31 April 30 110 (a) If the payment is made on 18.3 ... rebate will be allowed for unexpired time from 18.3 to 20.5 i.e., 13 + 30 + 20 i.e. for 63 days. He has to pay the discounted value of the total amount. 8 63 63 Discount = 8,500 x x = 680x = ` 117.37 100 365 365 Amount to be paid on 18.3 ... ` 8,500 – 117.37 = 8,382.63 (b) If the payment is deferred to 14.7, interest is to be paid from 20.5 ... to 14.7 ... i.e., for 11 + 30 + 14 = 55 days. 8 55 55 Interest = 8,500 x x = 680 x = ` 102.47 100 365 365 The amount to be paid on 14.7. ` 8,500 + 102.47 = 8,602.47 1.2.3 Case 2: Where amount is lent in one Instalment Calculation of average due date in a case where the amount is lent in one instalment and repayment is done in various instalments (opposite to what we have done in the first case). The problem takes a different shape. The procedure for calculating average due date can be summarised as under: Step 1: Calculate number of days/monthly/years from the date of lending money to the date of each repayment. 7.7 © The Institute of Chartered Accountants of India Accounting Step 2: Find the total of such days/months/years. Step 3: Quotient will be the number of days/months/years by which average due date falls away from date of commencement of loan. Thus, the formula for the average due date can be written as under: Sum of days/months/Years from the date of lending to the date of repayment of each instalment Average due date = Date of Loan + Number of instalments Illustration 5 ` 10,000 lent by Dass Bros. to Kumar & Sons on 1st January, 2008 is repayable in 5 equal annual instalments commencing on 1st January, 2009. Find the average due date and calculate interest at 5% per annum, which Dass Bros. will recover from Kumar & Sons. Solution Sum of the number of years/ months/ days from the date of lending to the date of repayment of each instalment Average due date = Date of Loan + Number of instalments 1+2+3+4+5 = Jan. 1, 2008 + 5 = Jan. 1, 2008+ 3 years = 1st Jan., 2011 Interest at a certain rate on the instalments paid from the date of payment to any fixed date will be the same as on ` 10,000 (if lent on 1st Jan., 2011 to that fixed date). There will be no loss to either party. Supposing rate of interest is 5% p.a. and date of settlement is 31st Dec., 2009 then calculation of interest by product method from both parties’ point of view will be as follows: Dass Bros. pays interest as follows: Amount Paid on Money used by Dass Bros Product upto 31st Dec. 2013 ` ` 2,000 1st Jan. 2009 5 Years 10,000 2,000 1st Jan. 2010 4 Years 8,000 2,000 1st Jan. 2011 3 Years 6,000 2,000 1st Jan. 2012 2 Years 4,000 2,000 1st Jan. 2013 1 Year 2,000 30,000 7.8 © The Institute of Chartered Accountants of India Average Due Date and Account Current Interest at 5% p.a. on ` 30,000 for one year. Rs. 30,000×5 = = ` 1,500 100 Dass Bros. will receive interest (if given on 1st Jan., 2011 on ` 10,000 from average due date to 31st Dec., 2013, i.e., for 3 years at 5% p.a. 5×3×Rs.10,000 = = ` 1,500 100 From the above, it can be concluded that if the borrower pays ` 2,000 yearly from 1st Jan., 2009 for 5 years and if the lender gives ` 10,000 on 1st Jan., 2011 then both will charge same interest from each other. There is no loss to any of the parties. But actually lender gives ` 10,000 on 1st Jan., 2008, therefore, he has given loan 3 years in advance and will charge interest on ` 10,000 for 3 years. Rs.10,000×5×3 Interest = = ` 1,500 (to be charged by Dass Bros.) 100 1.3 Calculation of Due Date after Taking into Consideration Days of Grace The due date of a bill of exchange is the date when the amount of a bill is payable by the drawee. A Bill of exchange or promissory note matures on the date on which it falls due. And every promissory note or bill of exchange (other than those payable on demand or at sight or on presentment) falls due on the third day after on which it is expressed to be payable. Examples (i) A bill dated 30th September is made payable three months after date. It falls due on 2nd January. (ii) A note dated 1st January is payable one month after sight. It falls due on 4th February. 1.4 Calculating Due Date of Bill or Note Payable Few Months after Date or Sight When the bill is made payable at a stated number of months after date or after sight or after certain events, then the period stated shall be held to terminate on the date of the month which corresponds with the day on which the instrument is dated. If the month in which the period would terminate has no corresponding day, the period shall be held to terminate on the last day of such month. Example: A Bill due on 29th January, 2011 is made payable at one month after date. The due date of instrument is 3rd day after 28th February, i.e., 3rd March (in 2011, February is of 28 days only). 7.9 © The Institute of Chartered Accountants of India Accounting 1.5 Calculation of Due Date when the Maturity Day is a Holiday When the day on which a promissory note or bill of exchange is at maturity (after including days of grace) is a public holiday, the instrument shall be deemed to be due on the preceding business day. The expression “public holiday” includes Sundays and other days declared by the Central Government by notification in the official gazette, to be a public holiday. And now if the preceding day is also a public holiday, it will fall on the day preceding the previous day. But if the holiday happens to be emergency or unforeseen holiday then the date shall be the next following day. Illustration 6 A trader having accepted the following several bills falling due on different dates, now desires to have these bills cancelled and to accept a new bill for the whole amount payable on the average due date : Sl. No. Date of bill Amount Usance of the bill 1 1st March 2010 400.00 2 months 2 10th March 2010 300.00 3 months 3 5th April 2010 200.00 2 months 4 20th April 2010 375.00 1 month 5 10th May 2010 500.00 2 months You are required to find the said average due date. Solution Calculation of the average due date Sl. No. Date of bill Due Date of Amount No. of days Product Maturity ` from starting date (4th May) 1 1st March 2010 4th May 400 0 0 2 10th March 2010 13th June 300 40 12,000 3 5th April 2010 8th June 200 35 7,000 4 20th April 2010 23rd May 375 19 7,125 5 10th May 2010 13th July 500 70 35,000 Total : 1,775 61,125 Average Due Date is 61,125/1,775 i.e., 34 days after the assumed due date, 4th May, 2010. The new bill should be for ` 1,775 payable on June 7th, 2010. Illustration 7 A owes B ` 890 on 1st January, 2010. From January to March, the following further transactions took place between A and B : 7.10 © The Institute of Chartered Accountants of India Average Due Date and Account Current January 16 A buys goods ` 910 February 2 A receives Cash loan ` 750 March 5 A buys goods ` 810 A pays the whole amount on 31st March, 2010 together with interest at 5% per annum. Calculate the interest by the average due date method. Solution Due Date Amount No. of days from Jan. 1 Product 2010 ` Jan. 1 890 0 0 Jan. 16 910 15 13,650 Feb. 2 750 32 24,000 March 5 810 64 51,840 Total 3,360 89,490 Calculation of average due date Sum of Products Average due date = Base date + days equal to Sum of the amounts ⎡89,490⎤ Jan. 1 + i.e., 27 days or Jan. 28 ⎢ ⎥ ⎣ 3,360 ⎦ Interest therefore has been calculated on ` 3,360 from 28th Jan. to 31st March, i.e., for 63 days. 5 63 3,360 x x = ` 29 100 365 Illustration 8 Radheshyam purchased goods from Hariram the due dates for payment is cash, being as follows: March 15 ` 400 Due 18th April April 21 ` 300 Due 24th May April 27 ` 200 Due 30th June May 15 ` 250 Due 18th July Hariram agreed to draw a Bill for the total amount due on the average due date. Ascertain that date. 7.11 © The Institute of Chartered Accountants of India Accounting Solution Due Date Amount No. of days Product ` from 18th April 18th April 400 0 24th May 300 36 10,800 30th June 200 73 14,600 18th July 250 91 22,750 Total : 1,150 48,150 48,150 Average Due Date is or 42 days after the base date. 1,150 18th April, i.e. 30 May. Illustration 9 Calculate Average Due date from the following information: Date of the bill Term Amount ` August 10, 2009 3 months 6,000 October 23, 2009 60 days 5,000 December 4, 2009 2 months 4,000 January 14, 2010 60 days 2,000 March 08, 2010 2 months 3,000 Solution Calculation of Average Due Date Date of bill Term Due date No. of days Amount Product from 10th ` ` August 2009 August 10, 2009 3 months Nov. 13, 2009 95 6,000 5,70,000 October 23,2009 60 days Dec. 25, 2009 137 5,000 6,85,000 December 04, 2 months Feb. 07, 2010 181 4,000 7,24,000 2009 January 14, 2010 60 days Mar. 18, 2010 220 2,000 4,40,000 March 08, 2010 2 months May 11, 2010 274 3,000 8,22,000 20,000 32,41,000 Total of product Average due date= Total of amount 7.12 © The Institute of Chartered Accountants of India Average Due Date and Account Current 32,41,000 = = 162.05 days 20,000 = 162 days (Approx.) after August 10, 2009 i.e. January 19, 2010. Illustration 10 Mr. Green and Mr. Red had the following mutual dealings and desire to settle their account on the average due date: Purchases by Green from Red: ` 6th January, 2011 6,000 2nd February, 2011 2,800 31st March, 2011 2,000 Sales by Green to Red: 6th January, 2011 6,600 9th March, 2011 2,400 20th March, 2011 500 You are asked to ascertain the average due date. Solution Calculation of Average Due Date Taking 6th January, 2011 as base date For Green’s payments Due date Amount No. of days from the Product base date i.e. 6th Jan. 2011 2011 ` 6th January 6,000 0 0 2nd February 2,800 27 75,600 31st March _2,000 84 1,68,000 Total 10,800 2,43,600 For Red’s payment 2011 6th January 6,600 0 0 9th March 2,400 62 1,48,800 20th March 500 73 36,500 Total 9,500 1,85,300 7.13 © The Institute of Chartered Accountants of India Accounting Excess of Green’s products over Red’s =` 2,43,600-` 1,85,300 =` 58,300 =` 10,800-` 9,500 =` 1,300 Number of days from the base date to the date of settlement is 58,300/1,300=45 days (approx.) Hence, the date of settlement of the balance amount is 45 days after 6th January i.e. on 20th February. On 20th February, 2011, Green has to pay Red ` 1,300 to settle the account. Summary • Average Due Date is one on which the net amount payable can be settled without causing loss of interest either to the borrower or the lender. • It is used in various cases like: (i) Calculation of interest on drawings of partners. (ii) Cancellation of various bills of exchange due on different dates and issuance of a Single bill. (iii) Amount lent in one instalment and repayable in various instalments. • When the amount is lent in various instalments then average due date can be calculated as : Total [Amount ×No. of days from base date to due date Average due date = Base date ± Total amounts • When interest is chargeable on drawings, and drawings are on different dates, interest may be calculated on the basis of Average Due Date of drawings. • Average due date in a case where the amount is lent in one instalment and repayment is done in various instalments will be: Sum of days/months/years from the date of lending to the date of repayment of each instalments Average due date = Date of Loan + Total amounts • Every promissory note or bill of exchange (other than those payable on demand or at sight or on presentment) falls due on the third day after on which it is expressed to be payable. This exempted period of three days is called days of grace. 7.14 © The Institute of Chartered Accountants of India Average Due Date and Account Current Unit 2 : Account Current Learning Objectives After studying this unit, you will be able to: ♦ Understand the meaning of Account Current. ♦ Learn the methods of preparing Account Current, namely preparation of Account Current with the help of interest tables, by means of product and by means of balances. ♦ Grasp the calculation procedure involved in the preparation of Account Current. 2.1 Introduction An Account Current is a running statement of transactions between parties for a given period of time and includes interest allowed or charged on various items. It takes the form of an account. Some of the situations when account current is prepared are: 1. It is prepared when frequent transactions regularly take place between two parties. An example is of a manufacturer who sells goods frequently to a merchant on credit and receives payments from him in instalments at different intervals and charges interest on the amount which remains outstanding. 2. A consignee of goods can also prepare an Account Current, if the latter is to settle the account at the end of the consignment & interest is chargeable on outstanding balance. 3. An Account Current also is frequently prepared to set out the transactions taking place between a banker and his customer. An Account Current has two parties - one who renders the account and the other to whom the account is rendered. This is indicated in the heading of an Account Current, which is like the following: “A in Account Current with B”. It implies that A is the customer, and the account is being rendered to him by B. 2.2 Preparation of Account Current There are three ways of preparing an Account Current: (i) With the help of interest tables; (ii) By means of products; and (iii) By means of products of balances. 2.2.1 Preparation of Account Current with the help of Interest Tables According to this method, all the transactions are arranged in the form of an account. There are two additional columns on both the sides of such an account. 7.15 © The Institute of Chartered Accountants of India Accounting (a) One column is meant to indicate the number of days counted from the due date of each transaction to the date of rendering the account. If no specific date is mentioned as the date on which payment is due, the date of the transactions is presumed to be the due date. (b) The other column is meant for writing interest. With the help of ready made tables, interest due on different amounts at given rates for different periods of time is found out and this is entered against each item separately. The interest columns of both the sides are totalled up and the balance is drawn. Illustration 1 Prepare Account Current for Nath Brothers in respect of the following transactions with Shyam: 2010 ` September 16 Goods sold to Shyam 200 due 1st Oct. October 1 Cash received from Shyam 90 October 21 Good purchased from Shyam 500 due 1st Dec. November 1 Paid to Shyam 330 December 1 Paid to Shyam 330 December 5 Goods purchased from Shyam 500 due 1st Jan. December 10 Goods purchased from Shyam 200 due 1st Jan. 2011 January 1 Paid to Shyam 600 January 9 Goods sold to Shyam 20 due 1st Feb. The account is to be prepared upto 1st February. Calculate interest @ 6% per annum. Solution Shyam in Account Current with Nath Brothers (Interest to 1st February, 2011 @ 6% p.a.) Date Particulars Due Amount Days Interest Date Particulars Due Amount Days Interest 2010 date ` 2010 date ` Sept.16To Sales 1st Oct. By Cash A/c 1st A/c Oct. 200 123 4.04 1 Oct. 90 123 1.82 Nov.1 To Cash 1st Oct. By Purchase 1st A/c Nov. 330 92 5.00 21 A/c Dec. 500 62 5.10 Dec. 1 To Cash A/c1st 330 62 3.36 Dec. By Purchase 1st Dec. 5 A/c Jan. 500 31 2.55 Dec. By Purchase 1st 10 A/c Jan. 200 31 1.02 2011 2011 7.16 © The Institute of Chartered Accountants of India Average Due Date and Account Current Jan. 1 To Cash 1st Feb. By Balance of Interest A/c Jan. 600 31 3.06 1 4.97 Jan. 9 To sales 1st Feb. By Balance 194.97 - A/c Feb. 20 1 c/d Feb. 1 To Interest 4.97 1,484.97 15.46 1,484.97 15.46 Tutorial Notes: (1) While counting the number of days, the date of due date is ignored and the date upto which the account is prepared, is included. (2) While counting the number of days, for opening balances, the opening date as well as date upto which the account is prepared, is counted. Calculation of days: Transaction Due Oct. Nov. Dec. Jan. Feb. Total 2010 Date Sept. 16 1st Oct. 30+ 30+ 31+ 31+ 1 = 123 Days Oct. 1 1st Oct. 30+ 30+ 31+ 31+ 1 = 123 “ Oct. 21 1st Dec. - - 30+ 31+ 1 = 62 “ Nov. 1 1st Nov. - 29+ 31+ 31+ 1 = 92 “ Dec. 1 1st Dec. - - 30+ 31+ 1 = 62 “ Dec. 5 1st Jan. - - - 30+ 1 = 31 “ Dec. 10 1st Jan. - - - 30+ 1 = 31 “ 2011 Jan. 1 1st Feb. - - - 30+ 1 = 31 “ Jan. 9 1st Feb. - - - - - = 0 “ 2.2.2 Preparation of Account Current by means of Products When this method is followed, the way of preparing the Account Current remains the same. It is only the method of calculating interest which is different. Under the previous method, interest columns are provided on both the sides of the Account Current, and interest in respect of each item is found out from the ready-made interest tables. In this method, interest columns are replaced by “product” columns. Product in this case is the amount multiplied by the number of days for which it has been outstanding. Interest on a certain sum of money for a certain number of days is the same thing as interest on the product for one day. In other words, with a view to reduce the period of each transaction to one day, 7.17 © The Institute of Chartered Accountants of India Accounting the amount of each transaction is multiplied by the number of days. This product is entered against each transaction the product column. The remaining steps are as follows: (a) Find out the balance of the products on the two sides. (b) Calculate interest at the given rate on the balance of the products for a single day. (c) Enter interest on the appropriate side in the amount column. This entry is made on the side other than that on which the balance of products appears. Taking Illustration 1 Account Current by means of Product is explained below : Shyam in Account Current with Nath Brothers (Interest to 1st February, 2008 @ 6% p.a.) Date Particulars Due Amount Days Product Date Particulars Due Amount Days Product 2010 date ` ` ` 2010 date ` ` ` Sept. 1st Oct. 1st 16 Nov. To Sales A/c Oct. 1st 200 123 24,600 1 Oct. By Cash A/c Oct.1 90 123 11,070 1 Dec. To Cash A/c Nov. 1st 330 92 30,360 21 Dec. By Purchase A/c Dec.1 500 62 31,000 1 To Cash A/c Dec. 330 62 20,460 5 By Purchase A/c Jan. 500 31 15,500 Dec.10 By Purchase A/c 1 Jan 200 31 6,200 2011 2011 Jan.1 To Cash A/c 1 Jan 600 31 18,600 Feb.1 By Balance of 30,250 products Jan.9 To Sales A/c 1 Feb 20 Feb.1 By Balance c/d 194.97 Feb.1 To Interest 4.97 30,250 × 6 365 100 1,484.97 94,020 1,484.97 94,020 2011 Feb To Balance b/d 194.97 Illustration 2 From the following particulars prepare the account current to be rendered by Mr. Singh to Mr. Paul as on 31st August, 2010. Interest must be calculated @ 10% p.a. 2010 ` 2010 ` June 11 Goods sent to Paul 1,020 July 7 Goods sent to “ 15 Cash received from Mr. Paul 700 Paul 500 Aug 8 Cash received from 1,100 Paul “ 20 Goods sent to Mr. Paul 650 7.18 © The Institute of Chartered Accountants of India Average Due Date and Account Current Solution Mr. Paul in Account Current with Mr. Singh (Interest to 31st August, 2010 @ 10% p.a.) Dr. Cr. Date Particulars Due Amount Days Product Date Particulars Due Amount Days Product Date ` Date ` 2010 2010 June June June 11 To Sales A/c 11 1,020 81 82,620 15 By Cash A/c 15 500 77 38,500 June June Aug. Aug. 20 To Sales A/c 20 650 72 46,800 8 By Cash A/c 8 1,100 23 25,300 July July Aug. 7 To Sales A/c 7 700 55 38,500 31 By Balance 1,04,120 of product Aug. 31 To Interest A/c 28.53 Aug. Rs.1,04,120 10 31 Balance c/d 798.53 × 365 100 2,398.53 1,67,920 2,398.53 1,67,920 Sept. To Balance b/d 798.53 Red - Ink Interest: In case the due date of a bill falls after the date of closing the account, then no interest is allowed for that. However, interest from the date of closing to such due date is written in “Red- Ink” in the appropriate side of the ‘Account current’. This interest is called Red-Ink interest. This Red Ink interest is treated as negative interest. In actual practice, however the product of such bill [value of bill X (due date-closing date) is written in ordinary ink in the opposite side on which the bill is entered]. Illustration 3 From the following particulars make up an Account Current to be rendered by S. Dasgupta to A. Halder at 31st Dec. reckoning interest at 5% p.a. 2010 ` June 30 Balance owing by A. Halder 520 July 17 Goods sold to A. Halder 40 Aug. 1 Cash received from A. Halder 500 Aug. 19 Goods sold to A. Halder 720 7.19 © The Institute of Chartered Accountants of India Accounting Aug. 30 Goods sold to A. Halder 50 Sept. 1 Cash received from A. Halder 400 Sept. 1 A. Halder accepted Dasgupta’s Bill at 3 month date for 300 Oct. 22 Goods bought from A. Halder 20 Nov. 12 Goods sold to A. Halder 14 Dec. 14 Cash received from A. Halder 50 Solution A. Halder in Current Account with Mr. S. Dasgupta (Interest to 31st December, 2010 @ 5% p.a.) Date Particulars Due AmountDays InterestDate Particulars Due Amount Days Interest Date ` Date ` 2010 2010 June Aug. Aug. 30 To Balance b/d 520185 96,2001 By Cash A/c 1 500 152 76,000 July July Sep. Sep. 17 To Sales A/c 17 40167 6,6801 By Cash A/c 1 400 121 48,400 Aug. Aug. Sep. Dec. 19 To Sales A/c 19 720134 96,4801 By Bills 4 300 27 8,100 Receivable A/c (Note : 1) Aug. Aug. Oct. Oct. 30 To Sales A/c 30 50123 6,15022 By Purchases 22 20 70 1,400 A/c Nov. Nov. Dec. Dec. 12 To Sales A/c 12 1449 68614 By Cash A/c 14 50 17 850 Dec. By Balance of 71,446 product 31 To Interest A/c 9.79 71,446×5% Aug. 31 By Balance 365 b/d 83.79 ------- 1,353.79 2,06,196 1,353.79 2,06,196 Note: It is assumed that the bill was honoured on due date. The due date of the bill should be treated as date of payment and days to be calculated from the due date of account. 7.20 © The Institute of Chartered Accountants of India Average Due Date and Account Current Workings: Calculation of Days Date of Due date June July Aug. Sept. Oct. Nov. Dec. Total Transactions : Opening 1 +31 +31 +30 +31 +30 +31 = 185 Balance July 17 July 17 − 14 +31 +30 +31 +30 +31 = 167 Aug. 1 Aug. 1 − − 30 +30 +31 +30 +31 = 152 Aug. 19 Aug. 19 − − 12 +30 +31 +30 +31 = 134 Aug. 30 Aug. 30 − − 1 +30 +31 +30 +31 = 123 Sep. 1 Sep. 1 − − − 29 +31 +30 +31 = 121 Sep. 1 Dec. 4 − − − − − − 27 = 27 Oct. 22 Oct. 22 − − − − 9 +30 +31 = 70 Nov. 12 Nov. 12 − − − − − 18 +31 = 49 Dec. 14 Dec. 14 − − − − − − 17 = 17 Illustration 4 Following transaction took place between X and Y during the month of April, 2010. ` April 1 Amount payable by X to Y 10,000 7 Received acceptance of X to Y for 2 months 5,000 10 Bills receivable (accepted by Y) on 7.2.2010 is honoured on this due date 10 X sold goods to Y (invoice dated 10.5.2010) 15,000 12 X received cheque form Y dated 15.5.2010 7,500 15 Y sold goods to X (invoice dated 15.5.2010) 6,000 20 X returned goods sold by Y on 15.4.2010 1,000 20 Bill accepted by Y is dishonoured on this due date 5,000 You are required to make out an account current by products method to be rendered by X to Y as on 30.4.2010, taking interest into account @ 10% p.a. 7.21 © The Institute of Chartered Accountants of India Accounting Solution ‘Y’ In Account Current with ‘X’ (Interest to 30th April, 2010 @ 10% p.a.) Dr. Cr. Date Particulars Due Amount Days Interest Date Particulars Due Amount Days Interest Date ` Date ` 2010 2010 2010 2010 April June April 7 To Bills 10 5,000 - - 1 By Balance b/d 10,000 30 3,00,000 Payable April May April May 10 To Sales A/c 10 15,000 - - 12 By Bank A/c 15 7,500 - - (Cheque received dated 15.5.2010) April May April May 20 To Purchase 15 1,000 - - 15 By Purchase 15 6,000 - - A/c Returns (invoice dated April April 15.5.2010) 20 To Bill 20 5,000 10 50,000 Receivable A/c April May April June 30 To Red Ink 15 30 1,12,500 By Red Ink 10 - 41 2,05,000 Product 15 Product (` 7,500 x as per contra 15) as per contra (5,000 x 41) April May April May 30 To Red Ink 15 30 90,000 By Red Ink 10 - 10 1,50,000 Product 15 Product (` 6,000 x as per contra 15) as per contra (15,000 x 10) April April May 30 To Balance of 30 By Red Ink 15 - - 15,000 Product product 4,17,500 as per contra (1,000 x 15) April 30 By Interest A/c 114.38 4,17,500 10x 365 April 30 By Balance c/d 2,385.62 26,000 6,70,000 26,000 6,70,000 No entry is required for matured bill on 10th April since party is not contracted. 7.22 © The Institute of Chartered Accountants of India Average Due Date and Account Current 2.2.3 Preparation of Account Current by Means of Product of Balances This method, also known as periodic balance method, is usually adopted in the case of banks where the balance of account is taken out after every transaction. In this case, the number of days written against each transaction are the days counted from its date or due date to the date of the following transaction. In the case of the last transaction, the number of days is counted to the close of the period. Each amount is multiplied with the number of days. If the amount represents a debit balance, the product is entered in the Dr. Product column; and if it represents a credit balance, the product is written in the Cr. Product column. The Dr. Product and Cr. Product columns are then totalled up. Interest is calculated on each total at the given rate of interest; and the net interest is ascertained. If net interest is payable to the customer, it will appear as “By Interest A/c”, and if it is due from the customer, it will appear as “To Interest A/c”. Illustration 5 On 2nd January, 2011 Vinod opened a current account with the Allahabad Bank Limited; and deposited a sum of ` 30,000. He further deposited the following amounts : 15th January ` 12,000 12th March ` 8,000 10th May ` 16,000 His withdrawals were as follows : 15th February ` 26,000 10th April ` 30,000 15th June ` 14,000 Show Vinod’s a/c in the ledger of the Allahabad Bank. Interest is to be calculated at 5% on the debit balance and 2% on credit balance. The account is to be prepared to be prepared as on 30th June, 2011. Calculation may be made correct to the nearest rupee. Solution Vinod Current Account with Allahabad Bank Ltd. Date Particular Dr. Cr. Dr. or Cr. Balance Days Dr. Product Cr. Product 2011 Jan. 2 By Cash Account − 30,000 Cr. 30,000 13 − 3,90,000 Jan. 15 By Cash Account − 12,000 Cr. 42,000 31 − 13,02,000 Feb. 15 To Self 26,000 − Cr. 16,000 25 − 4,00,000 Mar. 12 By Cash Account − 8,000 Cr. 24,000 29 − 6,96,000 April 10 To Self 30,000 − Dr. 6,000 30 1,80,000 - May 10 By Cash Account - 16,000 Cr. 10,000 36 - 3,60,000 June 15 To Self 14,000 - Dr. 4,000 15 60,000 - 7.23 © The Institute of Chartered Accountants of India Accounting June 30 By Interest A/c - 140 Dr. 3,860 - - June 30 By Balance c/d 3,860 - 70,000 70,000 2,40,000 31,48,000 July 1 To Balance b/d 3,860 * Interest is calculated as follows: On ` 31,48,000 @ 2% for 1 day = ` 172.49 On ` 2,40,000 @ 5% for 1 day = ` 32.87 Net Interest = ` 139.62 Summary • When interest calculation becomes an integral part of the account. The account maintained is called “Account Current”. Some examples where it is maintained are: (i) Frequent transactions between two parties. (ii) Goods sent on consignment (iii) Frequent transactions between a banker and his customers • There are three ways of preparing an Account Current : (i) With the help of interest tables (ii) By means of products (iii) By means of products of balances 7.24 © The Institute of Chartered Accountants of India