How do you calculate and charge interest on outstanding accounts
That question is much more complicated than you think - are you charging interest percentage daily? Weekly? Monthly? Anually? Once you have the period figured, you begin at some start point of your choosing. Exactly one "period" later, you multiply the basis (the outstanding balance) by the percentage rate (5%, for example, would mean you multiply by 0.05), then add that number to the basis - that's your new basis, your new outstanding balance.
But... if you charge an annual interest rate, and you compound daily or weekly or monthly, you have to take payments into account and adjust for them - it's fair to charge interest up to the moment of payment, but not beyond that moment; you can rightly only charge interest on the remaining unpaid balance beyond that date.
If you charge an annual interest rate but compound monthly, then every month you'd charge 1/12 of your annual interest rate. If weekly, 1/52. If daily, 1/365. The smaller the compounding period, the easier it is to calculate interest around payments, but the more paperwork is involved.
Jul 14, 2014 |