In businesses, lots of financial transactions take place with a single party at different points in time. This involves a large number of receipts and a hefty calculation of interests. In order to ease out this process, the idea of the average due date and account current notes have been introduced. Suppose a person owes several amounts on different dates. And, he wishes to pay the entire amount on a particular date, such that neither the debtor nor the creditor loses or gains anything by way of interest. Then, this date has termed the average due date. This unique system allows one to make a unified payment instead of multiple payments.
It is common in business to borrow many sums of cash from the same creditor. To make payments easier, we may generate an average deadline so that all instalments may be made on the same day. The mode of payment used to settle the payments, in this case, is obtained through average due date calculation. This concept is important for the CA foundation. So, we have to understand the basics of this topic.
How do we define the Due Date?
A date on which the bill of exchange or invoice is payable by the creditor to the debtor is known as the due date.
What does the Average Due Date Mean?
The average due date is the equated date on which a single payment is made in lieu of numerous payments on different dates, without any loss to either party. Here, the interest is calculated for several due dates and is called with respect to the average due date.
Calculation of Average Due Date:
For average due date calculation, first, we have to calculate the due dates for each transaction. The following steps can be followed:
- Add the credit period on the relevant date with 3 days of grace. The relevant date in case of bills of exchange may be the date of the invoice. But, in other cases, it will be the date of the transaction. Also, three days of grace is only added in the case of Bills of Exchange but not otherwise.
- If the date of maturity falls on a Public Holiday, the next working day will be considered the due date.
- If the due date is announced as an Emergency Holiday, the subsequent working days are taken as the due date.
Let’s understand the above more precisely, with the help of a table.
Due Date Related to | Nature of Holiday | Due Date |
Bills of Exchange/ Promissory Notes | Public Holiday Emergency / Holiday | Previous working day / Next working day |
Other cases of sale/ purchase | Public Holiday/ Emergency Holiday | Next working day |
Now, let’s understand the above concept with the help of examples.
EXAMPLE 1. Ajay drew a 2months bill on Varun on 8th May 2012. Calculate his due date if, on the original due date, an emergency holiday was announced.
Due Date = 8. 5. 2012 + 2 months + 3 days of grace = 11.7. 2012
But, on 11th July 2012, an emergency holiday was declared. So, the subsequent working day, i.e., 12th July 2012, will be considered the due date.
EXAMPLE 2. Rosy sales items on three months credit to Daisy on 26th October 2018. Calculate its due date.
Due Date = 26.10.18 + 3 months = 26.01. 19 [Here, no grace is calculated as the transaction is on sale of items.]
But, since 26th January is Republic Day, a public holiday, the due date will be the next working day, i.e., 27th January 2019.
Process of Average Due Date Calculation:
The formula used to calculate the average due date is given:
Average Due Date = Base Date
Here, you need to keep a few points in mind –
- Selection of Base Date: As per your convenience, you can select any due date between the first and the last as the base date. This needn’t be the first transaction, but it is advisable to choose an earlier due date.
- There are a certain number of intervening days between the base date and the due date of each transaction. Here, always ignore the first date but include the last date.
- If you obtain the due date in a fraction, always round it off to the nearest whole number.
- Remember to include the calculation of rebates when the amount is paid before the due date.
- Similarly, including the calculation of interests for paid amounts after the due date.
- In the case of the sale of goods by two parties (to each other) on different dates, the formula for the average due date changes.
Let’s understand the average due date calculation using an example:
Rs. 600 | Due on | 06/2/15 |
Rs. 320 | Due on | 07/4/15 |
Rs. 700 | Due on | 18/ 9/ 15 |
SOLUTION – Let the base date be 6.2.15
Due Date | Amount | Days from the base date | Product (amount days) |
6.2.15 | 600 | 0 | 0 |
7.4.15 | 320 | 62 | 19,840 |
18.9.15 TOTAL = | 700 1620 | 226 | 1,58,200 1,78,040 |
Therefore, Average due date = Base date + 178040/1620 = 6.2.15 + 110 = 22. 5.15
Conclusion
The average due date or the weighted average of several dates on which invoices are payable makes the payment easier. One equivalent date is used instead of multiple dates so that the interest can be settled accordingly. In this way, none of the parties gains or loses anything by way of interest. Besides, the amount payable can be due on any type of transaction – loans, promissory notes, or other sales. Calculation of the average due date involves assuming the base date and then finding its difference from the due date in each case. Finally, using the formula, we can obtain the required due date for paying the total amount along with interest. We believe that helped clear the concepts of the average due date and account for the current notes of students.