Example 6: Transactions with Static Rate of interest calculated daily

Example 6 Scenario

There are a series of transactions on Mr Smith's account - the first one is on 16 July 2004 and the last one is on 23 November 2006, the balance is currently $6704.35.

TRANSACTION HISTORY BEFORE INTEREST IS TAKEN INTO ACCOUNT

DATE	DESCRIPTION	AMOUNT	BALANCE
16/07/2004	Invoice No. 504	$950.05	$950.05
24/01/2005	Invoice No. 505	$1,482.18	$2,432.23
12/10/2005	Cheque No. 439758	$2,772.83CR	$340.60CR
05/11/2005	Invoice No. 506	$1,313.14	$972.54
11/11/2005	Dishonoured Cheque Fee	$50.00	$1,022.54
14/01/2006	Invoice No. 507	$3,071.38	$4,093.92
10/04/2006	Cheque No. 439759	$2,950.00CR	$1,143.92
26/05/2006	Invoice No. 508	$7,076.15	$8,220.07
15/07/2006	Cheque No. 439760	$1,447.98CR	$6,772.09
23/11/2006	Cheque No. 439761	$67.74CR	$6,704.35

He's given a lot of business over the years and has always paid up eventually, but the account has lost too much control now.

The credit supply agreement says that interest may be charged daily at a static interest rate of 7.5% per annum.

It also says that if the customer's account goes into credit (i.e. the store owes the customer) then no interest is payable to the customer.

Interest is not compounded.

Payments are allocated to the best benefit of the store.

We wish to calculate interest as at 21 September 2007.

Demonstrated Features

►	Introduction to debits and credits.

►	How to enter debit and credit transactions.

►	Launching transactions editor by double-clicking an entry.

►	Setting the payment allocation order.

►	Examine relevant parts of the calculation result.

Points of Interest

◆	The calculation applies credits (payments) in accordance with the selected Payment Application Order.

◆	The final balance of interest can be different to the total amount of interest calculated.

◆	All parts of the report including tables are available as merge fields for your wordprocessor.

Multimedia Presentation

Click icon to watch video

Click icon to see how to merge results with your own wordprocessor.

Calculation Results

The results generated by the program are shown below.

Calculation Result

Example 6

►	The result starts with a summary of the starting and closing principal, period, total and closing interest, amount owing and accumulation rate.

►	Amounts are given in words as well as figures.

SUMMARY

•	Calculated interest on transactions, starting with principal of nine hundred and fifty dollars and five cents ($950.05), for the period 16/07/2004 to 21/09/2007 inclusive, a period of 1163 days.

►	This paragraph tells you that the amount of owing at the end is different to the total amount of calculated interest, because of the way that payments (credits) have been allocated.

•	Total interest for the period was nine hundred and ninety-six dollars and sixty-eight cents ($996.68), however the amount now owing is five hundred and sixty-eight dollars and thirty-four cents ($568.34) because of the allocation of debits/credits during the period.

►	This paragraph tells you the amount owing, splitting it into principal (on which further interest will accrue), and interest.

•

As at 21/09/2007 the total amount owing is seven thousand seven hundred and one dollars and three cents ($7,701.03) comprised of principal of seven thousand one hundred and thirty-two dollars and sixty-nine cents ($7,132.69) and accumulated interest of five hundred and sixty-eight dollars and thirty-four cents ($568.34).

•	Interest on $7,132.69 continues to accumulate at one dollar and forty-seven cents ($1.47) per day on and from 22/09/2007.

►	This table conveniently sets out all the transactions before any interest is taken into account. It shows the transaction and effect on running balance.

►	You can paste this table into other documents.

►	The table - and all other parts of the report - are available as merge data fields that can be merged with your wordprocessing templates.

TRANSACTION HISTORY BEFORE INTEREST IS TAKEN INTO ACCOUNT

DATE	DESCRIPTION	AMOUNT	BALANCE
16/07/2004	Invoice No. 504	$950.05	$950.05
24/01/2005	Invoice No. 505	$1,482.18	$2,432.23
12/10/2005	Cheque No. 439758	$2,772.83CR	$340.60CR
05/11/2005	Invoice No. 506	$1,313.14	$972.54
11/11/2005	Dishonoured Cheque Fee	$50.00	$1,022.54
14/01/2006	Invoice No. 507	$3,071.38	$4,093.92
10/04/2006	Cheque No. 439759	$2,950.00CR	$1,143.92
26/05/2006	Invoice No. 508	$7,076.15	$8,220.07
15/07/2006	Cheque No. 439760	$1,447.98CR	$6,772.09
23/11/2006	Cheque No. 439761	$67.74CR	$6,704.35

PARTICULARS OF INTEREST

►	Every step of the calculation is then explained, this allows external verification of the calculation's accuracy, thus amplifying the evidential integrity of the result and ensuring that your opponent cannot raise doubt as to the calculation's accuracy.

►	The first line sets out the starting principal, the starting interest rate, and the number of days per year used to convert the annual interest rate into a daily interest rate.

(a) On 16/07/2004 the opening principal was $950.05, the interest rate on debit balances was 7.5% per annum, the interest rate on credit balances was nil (0.0%), and the days per year base used to convert the annual interest rates into daily interest rates was 366.

►	This paragraph clearly states the order in which payments are applied to principal and interest.

►	This order can significantly affect the amount of interest.

(b) Debits and Credits are each applied to non-principal then to interest then to principal.

►	Because the "Calendar Year" option for Days-Per-Year has been set, an extra calculation occurs before and after each leap year to account for the change in the number of days per year.

►	The number of days per year affects the daily rate of interest.

(c) Calculated interest on 31/12/2004 because it was the last day before the days per year base changed (from 366 to 365) on 01/01/2005. Interest on $950.05 (principal) at 7.5% per annum × 169 days (16/07/2004 to 31/12/2004 inclusive) ÷ 366 (days per year) is $32.90, resulting in a new unpaid interest balance of $32.90 ($0.00 plus $32.90).

(d) On 01/01/2005 the days per year base used to convert the annual interest rate into the daily interest rate changed to 365. The daily interest rate is now 0.02054795% on debit balances.

►	This paragraph explains a calculation step. It says why it is necessary and explains how the balance of interest changed.

►	This step is needed because the balance of principal on which interest is calculated was about to change.

(e) Calculated interest on 23/01/2005 because it was the last day before the balance of principal changed on 24/01/2005. Interest on $950.05 (principal) at 7.5% per annum × 23 days (01/01/2005 to 23/01/2005 inclusive) ÷ 365 (days per year) is $4.49, resulting in a new unpaid interest balance of $37.39 ($32.90 plus $4.49).

►	This paragraph sets out details of the debit invoice.

►	It also states that the whole balance was added to principal and tracks the change in the balance of principal.

(f) Debit on 24/01/2005: "Invoice No. 505" $1,482.18. The entire amount was added to principal, leaving a new principal balance of $2,432.23 ($950.05 plus $1,482.18).

(g) Calculated interest on 11/10/2005 because it was the last day before the balance of principal changed on 12/10/2005. Interest on $2,432.23 (principal) at 7.5% per annum × 261 days (24/01/2005 to 11/10/2005 inclusive) ÷ 365 (days per year) is $130.44, resulting in a new unpaid interest balance of $167.83 ($37.39 plus $130.44).

►	This paragraph sets out details of a payment.

►	It has applied the payment in accordance with the payment application order referred to in paragraph (b).

►	"Non-principal" refers to amounts on which no interest is said to be payable.

►	As there was no "non-principal", the payment was then allocated to interest. This wrote-off the entire balance of interest.

►	It then applied the balance of the credit to principal. The payment was big enough to completely write-off the balance of principal.

►	This left a credit balance of principal and no interest.

►	The CR suffix has been used to denote a credit balance.

(h) Credit on 12/10/2005: "Cheque No. 439758" $2,772.83CR. The payment was applied partly to interest ($167.83) and partly to principal ($2,605.00) leaving a new unpaid interest balance of $0.00 ($167.83 minus $167.83) and a new principal balance of $172.77CR ($2,432.23 minus $2,605.00).

►	This paragraph explains that an interest calculation was needed because the balance of principal was about to change.

►	In this case, no interest was payable on credit balances.

(i) Calculated interest on 04/11/2005 because it was the last day before the balance of principal changed on 05/11/2005. Interest on $172.77CR (principal) at 0% per annum × 24 days (12/10/2005 to 04/11/2005 inclusive) ÷ 365 (days per year) is $0.00, resulting in a new unpaid interest balance of $0.00 ($0.00 plus $0.00).

►	The debit is applied to principal. It is partly offset because there was a credit balance.

(j) Debit on 05/11/2005: "Invoice No. 506" $1,313.14. The entire amount was added to principal, leaving a new principal balance of $1,140.37 ($172.77CR plus $1,313.14).

(k) Calculated interest on 10/11/2005 because it was the last day before the balance of principal changed on 11/11/2005. Interest on $1,140.37 (principal) at 7.5% per annum × 6 days (05/11/2005 to 10/11/2005 inclusive) ÷ 365 (days per year) is $1.41, resulting in a new unpaid interest balance of $1.41 ($0.00 plus $1.41).

(l) Debit on 11/11/2005: "Dishonoured Cheque Fee" $50.00. The entire amount was added to principal, leaving a new principal balance of $1,190.37 ($1,140.37 plus $50.00).

(m) Calculated interest on 13/01/2006 because it was the last day before the balance of principal changed on 14/01/2006. Interest on $1,190.37 (principal) at 7.5% per annum × 64 days (11/11/2005 to 13/01/2006 inclusive) ÷ 365 (days per year) is $15.65, resulting in a new unpaid interest balance of $17.06 ($1.41 plus $15.65).

(n) Debit on 14/01/2006: "Invoice No. 507" $3,071.38. The entire amount was added to principal, leaving a new principal balance of $4,261.75 ($1,190.37 plus $3,071.38).

(o) Calculated interest on 09/04/2006 because it was the last day before the balance of principal changed on 10/04/2006. Interest on $4,261.75 (principal) at 7.5% per annum × 86 days (14/01/2006 to 09/04/2006 inclusive) ÷ 365 (days per year) is $75.31, resulting in a new unpaid interest balance of $92.37 ($17.06 plus $75.31).

►	This paragraph sets out details of a payment.

►	It has applied the payment in accordance with the payment application order referred to in paragraph (b).

►	As there was no "non-principal", the payment was then allocated to interest. This wrote-off the entire balance of interest.

►	It then applied the balance of the credit to principal.

(p) Credit on 10/04/2006: "Cheque No. 439759" $2,950.00CR. The payment was applied partly to interest ($92.37) and partly to principal ($2,857.63) leaving a new unpaid interest balance of $0.00 ($92.37 minus $92.37) and a new principal balance of $1,404.12 ($4,261.75 minus $2,857.63).

(q) Calculated interest on 25/05/2006 because it was the last day before the balance of principal changed on 26/05/2006. Interest on $1,404.12 (principal) at 7.5% per annum × 46 days (10/04/2006 to 25/05/2006 inclusive) ÷ 365 (days per year) is $13.27, resulting in a new unpaid interest balance of $13.27 ($0.00 plus $13.27).

(r) Debit on 26/05/2006: "Invoice No. 508" $7,076.15. The entire amount was added to principal, leaving a new principal balance of $8,480.27 ($1,404.12 plus $7,076.15).

(s) Calculated interest on 14/07/2006 because it was the last day before the balance of principal changed on 15/07/2006. Interest on $8,480.27 (principal) at 7.5% per annum × 50 days (26/05/2006 to 14/07/2006 inclusive) ÷ 365 (days per year) is $87.13, resulting in a new unpaid interest balance of $100.40 ($13.27 plus $87.13).

(t) Credit on 15/07/2006: "Cheque No. 439760" $1,447.98CR. The payment was applied partly to interest ($100.40) and partly to principal ($1,347.58) leaving a new unpaid interest balance of $0.00 ($100.40 minus $100.40) and a new principal balance of $7,132.69 ($8,480.27 minus $1,347.58).

(u) Calculated interest on 22/11/2006 because it was the last day before the balance of principal changed on 23/11/2006. Interest on $7,132.69 (principal) at 7.5% per annum × 131 days (15/07/2006 to 22/11/2006 inclusive) ÷ 365 (days per year) is $192.00, resulting in a new unpaid interest balance of $192.00 ($0.00 plus $192.00).

(v) Credit on 23/11/2006: "Cheque No. 439761" $67.74CR. The payment was applied entirely to interest, leaving a new unpaid interest balance of $124.26 ($192.00 minus $67.74).

(w) Calculated interest on 21/09/2007. Interest on $7,132.69 (principal) at 7.5% per annum × 303 days (23/11/2006 to 21/09/2007 inclusive) ÷ 365 (days per year) is $444.08, resulting in a new unpaid interest balance of $568.34 ($124.26 plus $444.08).

►	The last three paragraphs summarize the calculation.

►	They give the total owing, and the composition of its constituent parts i.e. principal and interest.

►	The last paragraph says how interest is accruing per day.

►	Amounts are given in words so they can be pasted into legal documents that require that.

(x) As at 21/09/2007 the total amount owing is seven thousand seven hundred and one dollars and three cents ($7,701.03) comprised of principal of seven thousand one hundred and thirty-two dollars and sixty-nine cents ($7,132.69) and accumulated interest of five hundred and sixty-eight dollars and thirty-four cents ($568.34).

(y) Total interest for the period 16/07/2004 to 21/09/2007 (1163 days) was nine hundred and ninety-six dollars and sixty-eight cents ($996.68).

(z) Interest on $7,132.69 continues to accumulate at one dollar and forty-seven cents ($1.47) per day on and from 22/09/2007.

Calculation Result

Example 6

TRANSACTION HISTORY BEFORE INTEREST IS TAKEN INTO ACCOUNT

DATE	DESCRIPTION	AMOUNT	BALANCE
16/07/2004	Invoice No. 504	$950.05	$950.05
24/01/2005	Invoice No. 505	$1,482.18	$2,432.23
12/10/2005	Cheque No. 439758	$2,772.83CR	$340.60CR
05/11/2005	Invoice No. 506	$1,313.14	$972.54
11/11/2005	Dishonoured Cheque Fee	$50.00	$1,022.54
14/01/2006	Invoice No. 507	$3,071.38	$4,093.92
10/04/2006	Cheque No. 439759	$2,950.00CR	$1,143.92
26/05/2006	Invoice No. 508	$7,076.15	$8,220.07
15/07/2006	Cheque No. 439760	$1,447.98CR	$6,772.09
23/11/2006	Cheque No. 439761	$67.74CR	$6,704.35

►	The second part of the report explains every step of the calculation but in table format.

►	The table can be printed or pasted into reports.

►	It is normally provided in Landscape format - it has been modified here for display on this web page.

►	It is a more compact way of narrating the calculation.

►	The table - and all other parts of the report - are available as merge data fields that can be merged with your wordprocessing templates.

►	The last paragraph says how interest is accruing per day.

INTEREST CALCULATION TABLE

DATE	DESCRIPTION	DAYS	AMOUNT	BALANCE	PRINCIPAL	INTEREST
16/07/2004	Interest rate started at 7.5% on debit balances (0.0204918% per day).			$950.05DR	$950.05DR	$0.00DR
31/12/2004	Interest (16/07/2004 to 31/12/2004 inclusive) $950.05 × 0.0204918% × 169 days = $32.90.	169	$32.90DR	$982.95DR	$950.05DR	$32.90DR
01/01/2005	Days per year changed to 365. Daily interest rate now 0.02054795% on debit balances.			$982.95DR	$950.05DR	$32.90DR
23/01/2005	Interest (01/01/2005 to 23/01/2005 inclusive) $950.05 × 0.02054795% × 23 days = $4.49.	23	$4.49DR	$987.44DR	$950.05DR	$37.39DR
24/01/2005	Invoice No. 505. Entire amount added to principal.		$1,482.18DR	$2,469.62DR	$2,432.23DR	$37.39DR
11/10/2005	Interest (24/01/2005 to 11/10/2005 inclusive) $2,432.23 × 0.02054795% × 261 days = $130.44.	261	$130.44DR	$2,600.06DR	$2,432.23DR	$167.83DR
12/10/2005	Cheque No. 439758. Payment was applied partly to interest ($167.83) and partly to principal ($2,605.00).		$2,772.83CR	$172.77CR	$172.77CR	$0.00DR
04/11/2005	Interest (12/10/2005 to 04/11/2005 inclusive) $172.77CR × 0% × 24 days = $0.00.	24	Nil	$172.77CR	$172.77CR	$0.00DR
05/11/2005	Invoice No. 506. Entire amount added to principal.		$1,313.14DR	$1,140.37DR	$1,140.37DR	$0.00DR
10/11/2005	Interest (05/11/2005 to 10/11/2005 inclusive) $1,140.37 × 0.02054795% × 6 days = $1.41.	6	$1.41DR	$1,141.78DR	$1,140.37DR	$1.41DR
11/11/2005	Dishonoured Cheque Fee. Entire amount added to principal.		$50.00DR	$1,191.78DR	$1,190.37DR	$1.41DR
13/01/2006	Interest (11/11/2005 to 13/01/2006 inclusive) $1,190.37 × 0.02054795% × 64 days = $15.65.	64	$15.65DR	$1,207.43DR	$1,190.37DR	$17.06DR
14/01/2006	Invoice No. 507. Entire amount added to principal.		$3,071.38DR	$4,278.81DR	$4,261.75DR	$17.06DR
09/04/2006	Interest (14/01/2006 to 09/04/2006 inclusive) $4,261.75 × 0.02054795% × 86 days = $75.31.	86	$75.31DR	$4,354.12DR	$4,261.75DR	$92.37DR
10/04/2006	Cheque No. 439759. Payment was applied partly to interest ($92.37) and partly to principal ($2,857.63).		$2,950.00CR	$1,404.12DR	$1,404.12DR	$0.00DR
25/05/2006	Interest (10/04/2006 to 25/05/2006 inclusive) $1,404.12 × 0.02054795% × 46 days = $13.27.	46	$13.27DR	$1,417.39DR	$1,404.12DR	$13.27DR
26/05/2006	Invoice No. 508. Entire amount added to principal.		$7,076.15DR	$8,493.54DR	$8,480.27DR	$13.27DR
14/07/2006	Interest (26/05/2006 to 14/07/2006 inclusive) $8,480.27 × 0.02054795% × 50 days = $87.13.	50	$87.13DR	$8,580.67DR	$8,480.27DR	$100.40DR
15/07/2006	Cheque No. 439760. Payment was applied partly to interest ($100.40) and partly to principal ($1,347.58).		$1,447.98CR	$7,132.69DR	$7,132.69DR	$0.00DR
22/11/2006	Interest (15/07/2006 to 22/11/2006 inclusive) $7,132.69 × 0.02054795% × 131 days = $192.00.	131	$192.00DR	$7,324.69DR	$7,132.69DR	$192.00DR
23/11/2006	Cheque No. 439761. Payment applied entirely to interest.		$67.74CR	$7,256.95DR	$7,132.69DR	$124.26DR
21/09/2007	Interest (23/11/2006 to 21/09/2007 inclusive) $7,132.69 × 0.02054795% × 303 days = $444.08.	303	$444.08DR	$7,701.03DR	$7,132.69DR	$568.34DR
	Final Balance	1163		$7,701.03DR	$7,132.69DR	$568.34DR

►	The third part of the report provides details about the calculation.

►	This is to complete the program's policy of exposing every factor that affects the calculation.

►	It also provides useful information about optional settings, and how they might be reviewed.

Calculation Notes

The following information is provided to give you a complete understanding of the calculation, so even the finest details are available if ever needed.

►	Once you are familiar with the program you will see that some settings are default settings (eg in an interest rates file) that can be overridden.

►	This paragraph gives the status of that.

1. The main calculation options (such as days per year, credit application order and rounding) have been taken from the settings on the main form. These options can be changed for individual calculations in Settings|Options, or for all new cases in Settings|Setup.

2. The debit interest rates have been taken from the settings on the main form.

3. The credit interest rates (if required) have been taken from the settings on the main form.

►	This paragraph informs you about the payment application order.

►	It reminds you how the outcome is affected by the setting you chose.

4. In Settings|Options you have selected the setting that tends to be best for the creditor (i.e. the person who is owed the money). It applies any payments against interest before it applies payments against principal. This keeps the amount of principal on which interest is calculated as high as possible for as long as possible thus maximising the total amount of interest.

►	This paragraph tells you the number of decimal places you have selected for rounding interest rates.

►	There are times when there are legislative or contractual rules about this factor.

5. Decimal Rounding. When converting from an annual rate of interest to a daily rate of interest, and except if overridden in an interest rates file, the program has rounded-up to 8 decimal places, eg 8.12512324924555 is rounded to 8.12512325%. You can change the setting in Settings|Options.

►	This paragraph demonstrates just one of many warnings and insights the program will give you.

►	It explains that the Calendar Year option has been selected and that it complicates the calculation.

6. Calendar Year. You are using the "Calendar Year" method for converting the annual interest rate to the daily interest rate. In many cases this is the most accurate setting but you should be aware that it adds complexity to the calculation report because it requires additional interest calculations before and after each leap year. If you require a simpler report and it is appropriate to do so then choose a different setting. The setting is either embedded in the Options section of the selected interest rate file or else it is set in Settings|Options on the main form. In either case you can change or override the setting for a particular calculation in Settings|Options. Please note that such settings only apply to the current calculation. You can change the default value that affects all new calculations in Settings|Setup. The default value cannot however automatically override any setting in the Options part of an interest rate file - you still have to override on an individual basis as explained above.