AverageDueDateAndAccountCurrent

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Average Due DatePaper 1: Accounting Chapter 7 Unit I

This e-Lecture was Recorded on:

February 4 , 2013

CA Intermediate (IPC) Course Paper 1 Accounting

Chapter 7 Unit 1

CA. S.K. Chhabra

The Institute of Chartered Accountants of India


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1 This lecture has been delivered by faculty members to supplement the

Study Material, Practice Manual and other content

2 The views expressed in this lecture are of the Faculty Member.

3

The content of this video lecture has not been specifically discussed

by the Council of the Institute or any of its Committees and the viewsexpressed herein may not be taken to necessarily represent the viewsof the Council or any of its committees

Disclaimer Statement

2


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The e-Lectures, PPT, Podcastsand Video lectures on ICAI

Cloud Campus aim tosupplement the Study Material,

Practice Manual and

Supplementary Study Material

The lecture recordings are madeaccording to the syllabus andlaws existing/ applicable as on

the date of recording.

Due to changes in law, there is

likely to be some time gapbetween these changes and therecording of updated lectures.

Hence, students are advised torefer to the Study Material

including Supplementary Study

Material, if any, and otherrelevant legislation for latest

provisions/ amendmentsrequired for forthcoming

examination.

Important Notes

3

This e-Lecture was Recorded on:

February 4, 2013


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Learning Objectives

4

Introduction

Also Called Zero Interest Date

Computing Average Due Date

Important Points For Noting Practical Exam Problems

Average

Due Date

Interest Computation Methods

Features of Account Current

How to Prepare Account Current Practical Exam Problems

Account

Current


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Average Due Date/ Zero Int. Date

5

What is Average Due Date???

Equated date on which single payment maybe made in respect of several payments dueon different dates

Simply speaking, average due date is thearithmetic average of various payment dates


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Average Due DateComputation

An Intro.

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Average Due Date Computation

7

Case I

Amount Lentin OneInstallment

Re-Paymentin Multiple

Installments

Case II

Amount Lentin MultipleInstallments

Repayment inOne

Installment


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Case I: One Payment, MultipleEqual Repayments

8

Calculation of Average Due Date when Amount is lent is one installment andrepayment is to be made in various equal installments

Sum of days/ months/ year

from the date of lending to the dateof repayment of Each installment

Average Due Date = Date of Loan +No. of Installment

Note: The above formula is applicable only if repayment is made only inequal installments


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Case II: Multiple Payments,Repayment in One Installment

9

Calculation of Average due date when amount is lent invarious installment and repayment is made in oneinstallment. Computation of Average Due Date in thiscase is done in following steps:

1. Take any due date as the Base Date, preferably theearliest due date should be taken as base date.

2. Calculate the number of days from the base date tothe due date of each transaction.if the due date oftransaction is after the Base date, its number of days

should be treated as plus, but if the due date oftransaction is previous to the base date, number ofdays should be marked minus.


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Case II - Continued

10

3. Multiply the number of days from base date byits respective amount

4. Add up the amounts and products

5. Divide the total of the products by the total of the

amount and get the result approximately up to a

whole number.(e.g. 7.4 days are equal to 7days

and 7.52 days are equal to 8 days.)

6. Add the number of days calculated above to theBase date and the result will be the average due

date


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Case II: Formulae

11

Average Due Date = Base Date + Total Product

Total Amount

If there are transactions of purchase and sale or B/R and B/P between two

parties then always take same base date and apply the following formula

Average Due Date = Base Date + Difference in Total Product

Difference in Total Amount


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Average Due Dates:Important Points

To be Noted

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Bills Receivables/ Payables

13

A bills of exchange or promissory note matureson the date on which it falls due. 3 days of grace

should always be added to the due date. Days of

grace should be added only in case of Bills

When the date on which bills of exchange is at

maturity is a public holiday, the instrument shall

be deemed to be due on the preceding business

days


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Bills Receivables/ Payables - 2

14

The expression public holidays includes Sunday,April 1, 30thSept (bank holiday), 26thJanuary,15thAugust, 2ndOctober, 25 December and other

holidays as per Government Gazette.

If the holiday happens to be emergency/

unforeseen holidays then the due date shall be

the next following day


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Payment Dates

15

If payment is made on the average due date, itresult in no loss of interest to either of the parties.

if payment is made after the due date then

interest is calculated from due date till date of

payment.

If payment is made before the Average DueDate THEN THERE IS SAVINGS OF INTEREST.


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Different Loan & Repayment Dates

16

If loan is given on one date and repayment of

Loan is given of different dates, then

Interest is calculated from the date of loan til l theAverage due date


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Purchase/ Sale of GoodsBetween Parties

17

In business, if one party purchase/ sells goods to

other party, and date of payment are different,

If all payment is made on average due date, then no

interest is payable

In this case the base dateof sale and purchasetransaction should be taken as same


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Month/ Days Computation

18

3.5 Months = 3 months and 15 days


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Average Due Date Pro-Forma

19

Due Date Days fromBase Date

Amount(Rs.)

Product


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Case Type I: One Payment, Multiple

Equal Repayments

Average Due Date Illustrations

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Illustration 1

Comprehensive Problem

May 2008 4 MarksCase Type I: One Payment, Multiple Equal Repayments

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Problem Statement Mr A advanced Rs 30,000/- to Mr B on 1.4.2008.

The amount is repayable in 6 equal monthly

installments commencing from 1.5.2008

Compute the Average Due Date for the loan

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Solution 1Average Due Date=Date of loan + Sum of months from the date

of lending to date of repayment ofeach installment

No. of installments

=1.4.2008 + 1+2+3+4+5+6

6

=1.4.2008+3.5 months

=16 July 2008

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Illustration 2


Nov 2002 4 MarksCase Type I: One Payment, Multiple Equal Repayments

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Problem Statement Mr A lent 25,000 to Mr B on 1 Jan 2000.

The amount is repayble in 5 half yearly

installments commencing from 1 Jan 2001

Calculate the Average Due Date at 10% Interest

per annum

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Solution 2 Calculation of sum of period from date of each

transaction from the date of loan

1st Payment is made after 12 months from loan

2ndPayment is made after 18 months from loan

3rdPayment is made after 24 months from loan

4thPayment is made after 30 months from loan

5thPayment is made after 36 months from loan

120

26


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Solution 2:ContinuedAverage Due Date=

Date of loan + Sum of months from 1 Jan 2000 to

date of each transaction

No. of installments

=1 Jan 2000+120

5

=1 Jan 2000+24months

=1 Jan 2002

27


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Solution 2:Continued Interest=25000*10/100*2

=Rs 5000

28


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Case Type II: Multiple Payments, One

Repayment

Average Due Date Illustrations

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Illustration 3


Case Type II: Multiple Payments, One Repayment

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Problem Statement

Calculate Average due date from the followinginformationDate of the bill Term Amount 16th August, 2010 3 months 3,000

20th October, 2010 60 days 2.500 14th December, 2010 2 months 2,000

24th January, 2011 60 days 1,000

06th March, 2011 2 months 1,500

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Solution 3Bill Date Amount Term Due

Date(Inclu

ding grace)

No. of days

from base

date 19 nov

Product=

Amount*

Days

16 Aug 10

20 Oct 10

14 Dec 10

24 Jan 11

6 Mar 11

3000 19 Nov

2 Months

60 Days

3 Months

2500

2000

1000

1500 2 Months

22 Dec

17 Feb

28 Mar60 Days

0

9 May

33

90

129

172 258000

129000

180000

82500

0

64950010000

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Solution 3:ContinuedAverage due date = Base date + TotalSum of Product

Sum of Amount

= 649500/10000

= 19 Nov. 10 + 65 Days (approx)

= 23, Jan, 11

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Illustration 4


May 1999 4 MarksCase Type II: Multiple Payments, One Repayment

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Problem StatementMr. Green and Mr. Red had the following mutualdealing and desire to settle their account on theaverage due date:

Purchases by Green from Red: Rs. 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

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Solution 4Calculation of Average Due Date

Taking 6th January, 2011 as the base date

For Greens payments

Due Date Amount No. of Day fromthe Base Date

Product

6 January

2 Febuary

31 March

6000

2800

2000

0

27

84

0

75600

168000

10800 243600

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Solution 4:ContinuedFor Reds payments

Due Date Amount No. of Day from

the Base Date

Product

6 January

9 March

20 March

6600

2400

500

0

62

73

0

148800

36500

9500 185300

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Solution 4:ContinuedAverage Due Date = Base Date + Difference in Total Product

Difference in Total Amount

Base Date + 2,43,600 1,85,30010,800 9,500

=6 Jan + 58,300/1,300

=6 Jan + 45 days (approx.)

=20 Feb 2011

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Illustration 5


May 2000

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Problem Statement

E owes to F the following amounts: (i)Rs. 5,000 due on 10th March, 2011

(ii)Rs. 18,000 due on 2nd April, 2011

(iii)Rs. 60,000 due on 30th April, 2011 (iv) Rs. 2,000 due on 10th June, 2011

He desires to make full payments on 30th

June 2011 with interests at 10% per annum

from the average due date. Find out the

average due date and interest.

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Solution 5Calculation of Average Due Date

Taking 10th March, 2011 as the base date

For Es paymentsDue Date Amount No. of Day from

the Base date

Product

10 March

2 April

30 April

5000

18000

60000

0

23

51

0

414000

3060000

85000 3658000

10 June 2000 92 184000

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Solution 5 ContinuedAverage Due Date=Base date + Sum of Product

Sum of amounts

=10 March 2011 + 3658000

85000

=10 March+43 days

=22 April 2011

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Solution 5 Continued Computation of Interest: Interest to be calculated on Rs. 85,000 from

22nd April, 2011 to 30th June, 2011 at 10% p.a.

i.e. interest on Rs. 85,000 for 69 days at 10%.

= Rs. 85,000x10/100 x 69/365

= Rs. 1,607 (approx)

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Illustration 6


November 2010

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Problem Statement

From the following details find out the averagedue date

Date of Bill

2 Months400020 March 2009

1 Month700012 July 2009

2 Months600010 August 2009

Amount Term of bill

29 Jan 2009 5000 1 Month

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Solution 6

Date Term Due date Amount Days frombase date

Product

1 Month

14 Aug

3 Mar 5000 0 0

20 Mar 2 Month 23 May 4000 81 324000

12 Jul1 Month

29 Jan

7000164 1148000

10 Aug 2 Month 13 Oct 6000 224 1344000

22000 2816000


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Solution 6 ContinuedAverage due date=Base date + Sum of

Product/Sum of amounts

=3 March + 2816000/22000

=3 March + 128 days

=9 July

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Account CurrentPaper 1: Accounting Chapter 7 Unit II

An Intro.

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What is Account Current?

49

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

F / P t ti f


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Form/ Presentation ofAccount Current?

50

Form of an Account

Copy of ledger account of the other party in the

books of the party sending the statement

An Account Current has Two Parties:

One who renders (Sends) the Account and

The other to whom the accounts is rendered.

A in account current with B.

It implies that A is the customer and the account is being

given to him by B in the books of B.


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Account Current - Exchange

51

Thus, When two parties have a number oftransactions between themselves, it is usual to

calculate the interest due.

The parties exchange between themselves

statement showing the various transactions in theperiod concerned and interest due.

This statement is in the form of a ledger account

known asAccount Current


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Account Current Interest Computation Methods

An Intro.

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Account Current


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Account Current Interest Computation Methods

53

Commonly Used Ordinary Method

Product Method

Others poque Method Daily Interest Method


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Ordinary Method

54

Each item is taken separately and the number ofdays from the due date of transaction to the end

of the period is calculated and interest worked out

at the agreed rate of interest for the required

period.

Note: In case of opening balance, the startingday is included in the total number of days

For e.g. if the opening date is 1-07-2012 then daysof July will be taken as 31.


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Product Method

55

Instead of calculating interest separately eachitem is multiplied by the number of days to the

end of period and interest is calculated on the net

product for one day.

In case of opening balance, the number of days,includes the opening day but no interest is

computed on closing balance

Interest = Balance of Products x Rate of Interest

365 days x 100


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poque Method

56

In this days are calculated from date of opening

date of the statement balance till due date of

each transaction.

In this method there is no question of red in

interest.


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Daily Interest Method

57

In this method days are calculated from the due

date of one transaction to the due date of the next

transaction.

This method is usually used in case of banks for

calculating interest on savings balance and

current account balance


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What is RED INKinterest???

58

In case the due date of a bill falls after the date ofclosing the account, then no interest is allowed for

that. However, interest from the date of closing to

such date is written in Red-Ink in the appropriate

side of the Account current.

The 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 of the account)is written in ordinary ink in the apposite side on

which date the bill is entered.


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Features of Account Current

Important Points

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Account Current Features

60

Account Current is a statement rendered by oneparty (say bank, dealer etc.) to the other party

Say - Customer, Clients etc.

It may be defined as an account of the

transactions between two parties during aparticular period in which interest is calculated at

an agreed rate on which debit and credit item and

the net balance of interest is included on the debit

or credit side of the account in the amountcolumn.


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Account Current Features - 2

61

In fact, it is a copy of ledger account of thecustomer in the ledger of a dealer It A renders account to B the heading of the account

will be B in Account Current with A.

Account Current is generally rendered by:

A banker to his client

A dealer to his customer

An agent to his principal

One Co-venture to another etc.


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Account Current Pro-Forma

62

Books of AB in Account Current with A

Date Particulars

Amount(Rs.)

Days

Product Date Particulars

Amount(Rs.)

Days Product


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How to Prepare AccountCurrent?Two Steps Process

63

Calculation ofDays for

computing interest

Calculation ofInterest

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Computation of Days for


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Computation of Days forComputing Interest

64

For counting the number of days, the date of the transaction (or due date) is ignoredand the date upto which the account is prepared is included. Therefore if the date ofthe transaction is 20th January and the account current is rendered on 31st March,the number of days will be counted from 21st January upto 31st March.

When transaction are relating to bills of exchange, etc., either due date (after adding

3 grace days) or the last day of period should be considered in the calculation ofnumber of days

Where the account current is started with the previous balance. Both opening dateand the last date of the period are included in the number of days.

When nothing has been mentioned, the date of transaction should be taken as thedue date.


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Important Note 1

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In Account current, where the rate of interest differs inrespect of debits and credits, interest should be

computed for debits and credit separately interest of

the net balance of the product should be taken to the

ledger.

The term of the bill after sight commences from the date

of acceptance of the bill, where as the term of a bill after

date commences from the date of drawing a bill.

Account Current is usually sent by A banker to its customers

A lender to its borrower

Supplier to its customer


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Important Note 2

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In the case of sale or purchase transaction, if anycredit period is allowed then only the due dateshould be considered as on effective date of

transaction for e.g. If goods are sold (on 2 monthscredit) on 1st June and the date of closing theaccount is 30th September, the number of dayswill be counted as under Due date is 01-08-2010

August 30 days September 30 days

Total Days = 60 days


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Illustration 1Comprehensive Problem

PCC May 2005 (8 Marks)

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Problem Statement

Make out an Account Current to be submitted by Raghuv toBarun on 30th September, 2010, in respect of the followingtransactions in the books of Raghav

July 1July 5

July 15

August 4

August 15

Debit balance b/fSold goods to Barun

Received cash from Barun

Barun purchased goods

Received cash from Barun

Rs 1350

Rs 900

Rs 1350

Rs 1920

Rs 900

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Problem Statement Continued

Sept 1Sept 1

Sept 12

Sept 15

Bought goods from BarunPaid cash to Barun

Sold goods to Barun

Paid cash to Barun

Rs 2100

Rs 750

Rs 960

Rs 600

Interest to be taken into account at 5 per cent for annum,

calculated to nearest rupee

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Solution 1

Books of RaghavBarun in account current with Raghav

Interest at 5% p.a upto 30 September 2010

Date Particulars Amount Days Product

July 1

July 5

August 4

Sept 1

Sept 12

Sept 15

To balance

To Sales

To Sales

To Cash

To Sales

To Cash

Sept 30 To Interest

Rs 1350

Rs 900

Rs 1920

Rs 750

Rs 960

Rs 600

Rs 21

92

87

29

18

15

57

124200

78300

109440

21750

17280

9000

6501 35997070


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Solution 1 Continued

Books of RaghavBarun in account current with Raghav

Interest at 5% p.a upto 30 September 2010

Date Particulars Amount Days Product

July 15

Aug 15

Sept 1

Sept 30

By Cash

By Cash

By Purchase

By Balance c/d

Rs 1350

Rs 900

Rs 2100

Rs 2151

77

46

29

103950

41400

60900

153720

6501 35997071


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Problem Statement

Mr A owed 4000 on 1st

January 04 to Mr X. The followingtransactions took place between them. It is agreedbetween the parties that interest@10% p.a is to becalculated

15 Jan 04 Mr X sold goods to Mr A Rs 2230

29 Jan 04 Mr X bought goods from A Rs 1200

10 Feb 04 Mr A paid cash to Mr X Rs 1000

13 Mar 04 Mr A accepted a bill drawn by Mr

X for one month Rs 2000

They agreed to settle their accounts on a single paymenton 15 Mar 04. Prepare Mr A in Account current with Mr X.Ignore days of grace

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Solution 2

Mr A in account current with Mr XInterest at 10% p.a upto 15 March 04

Date2004

Particulars Rs Days Product Date2004

Particulars Rs Days Product

Jan 1 To Balance b/d

754000 300000

Mar13

Jan15

Mar15

Sales

Red Ink

Product

To Interest

2230

110

60 133800

58000

Jan29

Feb10

Mar13

Mar15

By Purchase

Cash

BillsReceivable(Due

date 13 April)

Balance of

product

Balance c/d

1200

1000

2000

2140

46

34

55200

34000

402600

6340 4918006340 491800

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Solution 2:Working note Interest =402600*10*1/100*366 Red Ink Product=2000*29

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Problem Statement

On 2nd January 2012. Vinod opened a current account with ABBank with Rs 30,000 and deposited the following amounts:

15th January Rs. 12,000

12th March Rs. 8,000

10th May Rs. 16,000

His withdrawals were as follows: 15th February Rs. 26,000

10th April Rs. 30,000

15th June Rs. 14,000

Show Vinods A/c in the ledger of the AB Bank. Interest is to be

calculated at 5% on the debit and 2% on credit balance. Theaccount is to be prepared as on 30th June. 2012

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Solution 3

Date Particulars Dr Cr Balance Days Dr

Product

CrProduct

Jun15

Jan 2

Jan 15

Mar 12

Feb 15

Apr 10

May10

Jun30

Jun30

By cash A/c

By cash A/c

To Self

By cash A/c

To Self

By cash A/c

To Self

By Interest

By Balance c/d

30,000

12,000

26,000

8,000

30,000

14,000

16,000

140

3,860

30000

42000

10000

24000

6000

4000

3860

16000

13

31

25

29

30

36

15

390000

1302000

400000

696000

180000

360000

60000

240000 314800070000 70000

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Problem Statement From the information given below, prepare an account current to be

rendered by Ram to Shyam upto 31st December, 2011. Interest is to be

calculated at 10% p.a.

August 2, Goods sold to Shyam 900

August 20, Sight draft(bank draft) received from Shyam 450

October 10, Shyam purchased goods on one months credit 2,000

October 25, Cash received from Shyam 1,500

November 2, Goods returned by Shyam 300

November 30, Cash sent to Shyam 1,000

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Solution 4

Date

2011

Particulars Days Intere

st

Amt Date

2011

Particulars Days Inter

est

Amount

Shyam in account current with RamInterest to 31 December 2011 at 10% p.a

2 Aug To Sales 37.25151 900

30 Nov

10 Oct

31 Dec

To Sales duedate 10 Nov

To cash

To Interest(Contra)

51 28 2000

1000

2 Aug

25 Oct

2 Nov

31 Dec

By Bank

By Cash

By ReturnInward

By balance-Interest(Contra)

Balance c/d

133

67

59

16.38

27.5

450

1500

1675

31 8.5

25

4.87

25

300

392573.75392573.7581


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Thank You

AverageDueDateAndAccountCurrent

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