21st Century Accounting Tutorials - Receivables
How do I set up finance charges? How are they calculated?
Finance Charges (FCs) and Customer Balance Calculations
This lesson describes how to set up finance charges and how 21st Century Accounting calculates finance charges. Finance Charges (FCs) are reported on Finance Charge Detail, Aged Receivables, Customer Activity, and Customer Analysis reports and on Statements.
| Reports |
Calculations Described |
Finance Charge Detail
Aged Receivables
Customer Activity
Customer Analysis |
Finance charges |
| Statements |
Finance charge amounts
|
Follow the Billing Cycle Checklist
The finance charges and balance details that print on statements depend on the customer type and the order in which procedures are carried out and statements are printed during the billing cycle. The standard ordering of operations for a billing cycle is:
- Enter transactions (charges, receipts, and adjustments) for all customers in billing cycle.
- Apply finance charges, where applicable.
- Apply recurring charges, where applicable.
- Print statements.
- Age/close the billing cycle.
The location of the buttons on the Billing Cycle Checklist window promotes the recommended order of procedures in the Receivables business cycle.
Assign Customer Types and FCs in Configure/Customers
-
The customer type (in conjunction with Finance Charge Configuration) determines how finance charges are applied. In 21st Century Accounting, customers may be one of four types:
Open item. System uses Level method to calculate FCs for all Open Item type customers.
Balance forward. System uses Level method to calculate FCs for all Balance Forward type customers.
Revolving. You choose either Level method OR Average daily balance (ADB) method used to calculate FCs for all Revolving type customers. The system uses ADB method if you check "Use ADB method (revolving customers only)" in Configure/Finance Charges.
Fixed payment. System uses Level method used to calculate FCs for all Fixed Payment type customers.
-
Check the "Apply finance charges" box for customers who will be charged FCs.
-
In Configure/Finance Charges, set up Level Method minimum balance and rates for customers to whom this method will apply, if any.
-
If you want to use Average Daily Balance method for Revolving-type customers, check the "Use ADB method (revolving customers only)" box and set up the minimum balance and rate.
Both Level Method and ADB method are configured in the following example. You configure ADB only if you want your Revolving customers to pay FCs on their average daily balance.
An example of a Configure/Finance Charges window might look like this:
Level method lets you set up two FC rates and a "cap" above which the second rate will be applied.
Minimum balance is the account balance below which FCs are not charged.
A "rate" of 0.12 is a 12% finance charge.
Level Method
The system uses the Level Method to calculate finance charges for all customers (unless you specify the Average Daily Balance Method for Revolving type customers).
You can establish two FC rates and a balance over which to apply the second rate so you can apply different rates to accounts when they run higher balances.
Open Item type customers pay FCs on the sum of the outstanding balances of all invoices and recurring charges whose due dates are earlier than the date you assess the FCs.
Balance Forward type customers pay FCs on the outstanding past due balance (minus FCs and new payments received, if any) whose due date is earlier than the date you assess the FCs. Balance forward customer invoices are not considered past due until after they have been aged.
Level Method FCs for Revolving type customer accounts are applied to the current total balance (excluding previous finance charges), minus current period charges and payments received.
Fixed payment type customers pay no FCs unless they miss a payment. FCs are applied to the outstanding fixed payments whose due dates are earlier than the date you assess the FCs, minus the total of any current payments received.
Average Daily Balance Method
You can configure the system to use the Average Daily Balance (ADB) method to calculate finance charges for all Revolving accounts. The system calculates ADB as:
Sum of daily transaction balances / Number of transaction days.
The number of transaction days is the number of days since the last aging date, that is, the last date you entered when you ran Age/close cycle in the Billing Cycle Checklist window.
The system multiplies the ADB by the finance charge rate (set in Configure/FCs) to calculate the FCs. If the ADB is below the minimum balance (set in Configure/FCs) no FC is applied.
Sample statements with finance charges
In each of the examples below, the customer starts with a $1,000 purchase due on 1/02/05, is assessed finance charges at 2%, is billed at the end of each month, and makes no payments through the March billing cycle. For the revolving and fixed payment customer examples, the minimum payment for the customer is set to $100 and the revolving pmt rate is set to .01 (1%). The example shows the aging bucket values and minimum payment amounts that would print at the bottom of the statement.
The description uses the "default" aging buckets:
Current, 1-30 days, 31-90 days, 91-120 days, 120+ days
Note that in 21st Century Accounting you can change the number of days in each bucket and specify the "aging date" when you run each of the reports.
For an open item customer:
01/31/05 statement:
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 20.00 |
1,000.00 |
0.00 |
0.00 |
0.00 |
0.00 |
1,020.00 |
02/28/05 statement:
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 20.00 |
20.00 |
1,000.00 |
0.00 |
0.00 |
0.00 |
1,040.00 |
03/31/05 statement:
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 20.00 |
20.00 |
20.00 |
1,000.00 |
0.00 |
0.00 |
1,060.00 |
For a regular balance forward customer:
01/31/05 statement:
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 1,000.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
1,000.00 |
02/28/05 statement:
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 20.00 |
1,000.00 |
0.00 |
0.00 |
0.00 |
0.00 |
1,020.00 |
03/31/05 statement:
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 20.00 |
20.00 |
1,000.00 |
0.00 |
0.00 |
0.00 |
1,040.00 |
For a revolving customer:
01/31/05 statement:
| Minimum Payment: 100.00 |
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 1,000.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
1,000.00 |
02/28/05 statement:
| Minimum Payment: 220.00 |
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 920.00 |
100.00 |
0.00 |
0.00 |
0.00 |
0.00 |
1,020.00 |
03/31/05 statement:
| Minimum Payment: 340.00 |
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 820.00 |
120.00 |
100.00 |
0.00 |
0.00 |
0.00 |
1,040.00 |
For a fixed payment customer:
01/31/05 statement:
| Minimum Payment: 100.00 |
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 1,000.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
1,000.00 |
02/28/05 statement:
| Minimum Payment: 202.00 |
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 902.00 |
100.00 |
0.00 |
0.00 |
0.00 |
0.00 |
1,002.00 |
03/31/05 statement:
| Minimum Payment: 306.04 |
| Current |
30 Days |
60 Days |
90 Days |
120 Days |
120+ Days |
Amount due |
| 804.04 |
102.00 |
100.00 |
0.00 |
0.00 |
0.00 |
1,006.04 |
Back To Top | Back To Main Tutorials Page
