Financial Accounting Chapter 07B – Average Due Date and Account Current

Average Due Date and Account Current

07B.01. Average Due Date

 Average is a single figure representing a group of figures. Average due date is

a mean date on which a single amount can be paid in lieu of several payments
on different dates.

 When several bills of exchange are drawn by the drawer on the drawee
payable on different dates, the drawee should make payments on those
different dates to discharge his liability.

 Both the parties may feel it inconvenient to make / receive payments at

different dates. As a solution, a mean date is calculated for a lump sum
payment, which may result neither in any loss of interest to the drawer nor
any undue advantage to the drawee.

The average due date technique of payment may be used in the following situations:
1. In connection with the settlement of contra accounts, that is X and Y sell
goods to each other on different dates.
2. In the settlement of accounts between a principal and agent.
3. In calculating interest on partner’s drawings.
4. In calculating interest on book debts which is realised piecemeal during
dissolution of partnership.

Steps for Calculation of Average Due Date

Step 1 Select one of the due date as the base date from which calculations are to
be made. Any due date may be taken as a base date but preferably we
should take the first due date as the base date.

Step 2 Calculate the number of days (plus or minus) of each of the other due date
from the base date.

Step 3 Multiply the amount of each payment by the respective number of days as
calculated under step 2.

Step 4 Add the amount of each payment and also add the products.

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Step 5 Divide the total of the products by the total of the amount payable. The
result will give the number of days which are added to (or subtracted from)
the base date and thus, the average due date is found out.
If the due date is in a fraction, round it off to the next whole number.

Due Date of a Bill of Exchange

 The due date of a bill of exchange is the date when the amount of the bill is
payable by the drawee. A bill of exchange payable at sight becomes due
immediately after the bill is presented for payment.

 A bill of exchange, payable at a predetermined time in the future, becomes

due on the expiry of the period of the bill. The time after which the term bill is
to be paid is said to be the tenure of the bill. But it is customary to allow three
days of grace to the drawee to pay the amount in the case of a term bill.
Therefore, while calculating the due date of a term bill, in its period, for which
it is drawn, three more days are added. For example, a bill is drawn on
01.01.2003 for 3 months; the due date of the bill is 04.04.2003.

A bill payable can be

(a) a certain period after date; or (b) a certain period after sight
When the bill contains a direction to ‘pay three months after date’, three months
have to be counted from the date of drawing of the bill. But, when the bill contains a
direction to ‘pay three months after sight’, three months have to be counted from
the date of acceptance of the bill.

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Average Due Date as the Basis for Calculating Interest

We have already mentioned that if the payment is made exactly on the average due
date, the drawer / creditor will not suffer any loss in respect of interest. In case the
drawee / debtor delays the payment of lump sum amount, the drawer / creditor will
lose interest for the period of delay. In this situation the drawee / debtor should pay
interest at agreed rate for the period of delay, that is, the difference between
average due date and actual date of payment.

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07B.02. Account Current

 An Account Current is a statement of mutual transactions between two

parties for a given period of time, and includes interest payable to or
receivable from the other party at an agreed rate.

 It takes the form of an account with some additional columns for due date,
number of days, interest or interest product, and the like.

 All transactions are recorded according to date. It is, in fact, a copy of the
Debtor’s Ledger Account in the books of the creditors.

Account Current is prepared, generally, in the following situations:

1. When frequent transactions regularly take place between two parties and
interest is chargeable on outstanding balance at an agreed rate.

2. When goods are sent by the consignor to the consignee for sale but the later
is to settle the account at the end of the consignment and as per the
agreement the consignee is to pay interest on outstanding balance.

3. When two or more persons are in joint venture and each co-venturer is
entitled to interest on their investment and no separate set of book is
maintained for the joint venture.

4. When frequent transactions take place between a banker and his customers.

Parties in an Account Current

An Account Current has two parties – one who renders the account and the other to
whom the account is rendered. If X renders the account to Y, then in the books of X,
the heading of the account is written as “Y in Account Current with X”.

Preparation of Account Current

There are two methods of preparing Account Current

(a) The Forward Method; and
(b) The Backward Method or Epoque Method

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The Forward Method: This method can again be divided into two -
(i) Preparation of Account Current with the help of interest tables; and
(ii) Preparation of Account Current by means of product.

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