An Account Current is a running statement of transactions between parties for a given period of time in the shapes of an account and includes interest allowed or charged on various items. It involves two parties. One, who renders the account and the other to whom the account is rendered.
Characteristics of Account Current
Characteristics of an Account Current are as follows:
- It looks like an extended ledger account of a party in the books of another party.
- The transactions are arranged chronologically.
- There is interest column on each side of the account.
- The interest columns are memorandum entries and are not a part of entry in the books of account.
- Interest is usually calculated on the basis of number of days and the principal amount.
Parties involved in exchanging Account Current
The following parties are involved in exchanging Account Current:
- Merchants buying and selling goods on credit to each other.
- Supplier and customer when payments by customer are irregular.
- Principal and his agent.
- Lender and borrower.
- Broker and his client.
- Head office and his branch.
- Consignor and Consignee.
Methods of Calculation of Days
There are three methods for calculating the number of days:
- Forward Method: In this method the numbers of days are counted from the due date of the transaction to the date of settlement or closing date of the statement.
- Backward Method or Epoque Method: In this method the numbers of days are counted from the opening date of the account current to the due date of the transaction.
- Daily Balance Method: In this method days are counted from the due date of one transaction to the due date of the next transaction (normally used in banks for calculating interest on overdrafts and saving bank accounts).
Rules of Calculation of Days
- When the days are counted in account current, the date of the transaction should be excluded. But the last date for which the account current is being sent should be included.
- The actual date of the transaction should be taken into consideration for calculating the number of days irrespective of the method followed.
- In case, when the account current continued with previous balance, both the opening date and the last date of the period are included. However, if the transaction takes place on the opening date itself, that date should be excluded.
- Where credit period is allowed, the days should be counted from the date of the transaction, after the credit period is over.
Method of Calculating Interest
- Calculating interest on Item separately : Ready Interest tables (Simple Interest Tables) may be used to calculate interest on each item separately from its due date to the date on which the account current is prepared. The interest columns of both the sides are totaled up and the balance is drawn.
- Product Method : In this method, transaction amount is multiplied by the number of days from its date to the date of settlement. The products so obtained are written in a separate column on each side of the account. The balance of the total product of two sides is taken and interest is calculated on this balance for one day.
- Red Ink Interest : Sometimes the due date of the transaction falls after the closing date of the account current. In such cases, the days are counted from the settlement date to the date of transaction with minus sign. The product is also marked with (-) sign. Interest from the date of Closing to such due date is written in “Red Ink”, hence is called the ‘Red Ink Interest’ treating it as negative interest. In Actual practice, however the product of such bill [Value of Bill x (Due Date – Closing Date)] is written on the opposite side on which the bill is entered.
- Epoque Method : This is an alternative method of calculating interest. Product (No. of days x amount) is calculated from the date of the transaction to the date of the beginning of the account. The products on each side are totaled and the interest on the difference for one day is entered on the side which is shorter. In this case, red ink interest does not arise but the amount due (before calculating interest) multiplies by the number of days. The balance due in the beginning will be ignored (since the number of days involved is zero).
- Periodical Balance Method : This method is normally adopted by banks where the balance of account is taken out after every transaction. Number of days against each transaction are 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 and put in two columns (Dr. Product column; Cr. Product column). According to the nature of balances, interest is calculated on total of each column at the given rate of interest for one day and the net interest is ascertained. Interest payable to the customer appears as “By Interest A/c” and due from the customer appears as “To Interest A/c” in the respective side.
Account Current Interest Calculation – Practical Problem
Account Current in three methods
Ex. Sahil owed Rs.1,000 to Rajat 1st January, 2009. The following transactions took place between the two parties:
|2009||Jan||15,||Sahil sells goods to Rajat Rs.700|
|Feb||10,||Sahil purchased goods from Rajat Rs.500 (due date March 15).|
|Feb||20,||Rajat sends cash to Sahil Rs.100.|
|March||5,||Sahil sells goods to Rajat, Rs.200 (due date April 30)|
|April||25,||Sahil received 3 months’ acceptance from Rajat for Rs.500|
|May||10,||Sahil pays cash, Rs.300.|
|June||15,||Sahil sells goods to Rajat, Rs.600 (due date July 15).|
Interest is @ 10% p.a. Prepare the Account Current to be sent by Rajat to Sahil on 30th June, 2009.
- Calculated for each Transaction separately:
Books of Rajat
Sahil in Account Current with Rajat as on 30th June, 2009
|Date||Due date||particulars||Amount Rs.||No. of Days||Interest Rs.||Date||Due date||particulars||Amount Rs.||No. of Days||Interest Rs.|
|Jan. 1||Jan. 1||To Balance b/d||1,000||181||49.59||Jan. 15||Jan. 15||By Purchases A/c||700||166||31.84|
|Feb. 10||Mar. 15||To Sales A/c||500||107||14.66||Mar. 5||30-Apr||By Purchases A/c||200||61||3.34|
|Feb. 20||Feb. 20||To Cash A/c||100||130||3.56||May 10||May. 10||By Cash A/c||300||51||4.19|
|Apr. 25||July. 28||To Bills Payable A/c||500||-28||-3.84||15-Jun||July. 15||By Purchases A/c||600||-15||-2.47|
|June 30||To Interest A/c||27.07||June 30||By Difference in Interest||27.07|
|By Balance c/d||327.27|
- Product Method:
Books of Rajat
Sahil in Account Current with Rajat as on 30th June 2009
|Date||Due date||particulars||Amount Rs.||No. of Days from 1Jan||Product Rs.||Date||Due date||particulars||Amount Rs.||No. of Days from 1Jan.||Product Rs.|
|Jan. 1||Jan. 1||To Balance b/d||1,000||181||1,81,000||Jan. 15||Jan. 15||By Purchases A/c||700||166||1,16,200|
|Feb. 10||Mar. 15||To Sales A/c||500||107||59,500||Mar. 5||Apr. 30||By Purchase A/c||200||61||12,200|
|Feb. 20||Feb. 20||To Cash A/c||100||-130||13,000||May 10||May 10||By Cash A/c||300||51||15,300|
|Apr. 25||July 28||To Bills Payable A/c||500||-28||14,000||June 15||July 15||By Purchases A/c||600||-51||-9,000|
|June 30||June 30||To Interest [98,800 x 10% x (1/365)]||–||–||June 30||By Difference in Products||98,800|
|June 30||By Balance c/d||327.07|
|July 1||To Balance c/d||327.07|
- Epoque Method
|Date||Due date||particulars||Amount Rs.||No. of Days from 1Jan.||Product Rs.||Date||Due date||particulars||Amount Rs.||No. of Days from 1Jan.||Product Rs.|
|Jan. 1||Jan. 1||To Balance b/d||1,000||–||–||Jan. 15||Jan. 15||By Purchases A/c||700||15||10,500|
|Feb. 10||Mar. 15||To Sales A/c||500||74||37,000||Mar. 5||30-Apr||By Purchase A/c||200||120||24,000|
|Feb. 20||Feb. 20||To Cash A/c||100||51||5,100||May 10||May. 10||By Cash A/c||300||130||39,000|
|Apr. 25||July. 28||To Bills Payable A/c||500||209||1,04,500||June 15||July. 15||By Purchases A/c||600||196||1,17,600|
|June 30||June 30||To Balance of Products||–||–||98,800||June 30||By Products for balance *(Rs.300)||181||54,300|
|June 30||To Interest [98,800 x 10% x (1/365)]||27.07||–||–||June 30||By Balance c/d||327.07|
*Note: 1,000+500+100+500-(700+200+300+600) = Rs.300
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