For overdue accounts, you can calculate interest charges based on:
- Each document individually.
- The total outstanding balance.
Note: Balance-forward accounts are always charged interest on overdue balances.
Calculating Interest by Document
When you charge interest by document, interest is calculated separately for each overdue document or scheduled payment. Documents are overdue when they are outstanding beyond their due dates (plus any grace days you allow in the interest profile).
The interest calculation includes all:
- Invoices.
- Unapplied debit and credit notes.
- Unapplied cash.
- Unapplied prepayments.
- Interest invoices (if you selected Compound Interest in the interest profile).
If interest was charged previously, interest charges are calculated for the period from the date interest was last charged to the Run Date you enter in the Create Interest Batch screen. Otherwise, interest charges are calculated from the document due date to the Run Date.
Interest charges on an overdue invoice are calculated by multiplying the overdue amount by the annual interest rate and the number of days overdue, and then dividing the result by 365 (or 366 in a leap year):
(overdue invoice amount) * (annual rate) * (number of days overdue) / 365
Because the interest calculation also includes credit notes, unapplied cash, and prepayments, the net interest may be negative. If the interest calculated is negative, no interest is charged or credited.
Calculating Interest by Balance
When you charge interest by overdue balance, interest is calculated in the same way for both balance-forward and open-item customers.
If any document is overdue beyond the grace period specified in the interest profile (in the Charge Interest On Accounts [ ] Days Overdue field), interest is charged on the total overdue balance. Current documents are not included in the calculation.
Interest charges are calculated for the period from the due date of the oldest outstanding document to the Run Date in the Create Interest Batch screen, unless interest has already been charged during that period. If interest has been charged previously, interest charges are calculated for the period from the date interest was last charged to the Run Date.
Interest charges for the period are calculated by multiplying the net overdue balance as of the Run Date by the annual interest rate and by the number of days in the interest period, then dividing the result by 365 (or 366 in a leap year):
(Net overdue balance) * (Annual rate) * (Number of days in the interest period) / 365
The net overdue balance includes all:
- Overdue invoices.
- Overdue debit notes.
- Overdue adjustments.
- Overdue interest invoices (if you selected Compound Interest in the interest profile).
- Unapplied credit notes.
- Unapplied cash receipts.
- Unapplied prepayments.
If the net balance is negative, no interest is charged or credited.