Average Due Date Formula
Talking about the current scenario of businesses, there are a great number of payments and receipts that get involved even if it is related to just one party. And all these may or may not occur at the same point of time. For simplifying the interest calculations that are involved in these transactions, methods like calculating the average due date come very handy. According to this concept, the person clears their dues on a specific date in such a way that neither the creditor nor the debtor suffers any kind of gain or loss by way of interests. This date is referred to as the average due date or ADD.
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Meaning Calculation of Average Due Date in Various Situations
Average due date is usually used in situations as mentioned below.
To calculate the interest of the drawings of partners.
To settle accounts between agent and principle.
To settle contra accounts wherein parties sell product to one another.
To make a lump sum payment against several bills that are drawn on varying dates with different due dates.
Average Due Date= Base date ± \[\frac{\text{Total of the Products}}{\text{Total of the Amounts}}\]
Case 1: When Just one Party is Involved
According to this Method, the Average due date is Calculated in the Following Manner.
1. The first due date is taken as the starting day or O day or base date.
2. The number of days from the base date are counted up to every due date.
3. Then the number of days are multiplied by the amounts.
4. The amount and the products are then added.
5. The product total is divided by the amount total and the result obtained is approximated to a whole number.
6. The number of days are added to the base date for finding the average due date. Hence, the average due date formula is given by:
Average Due Date= Base Date ± \[\frac{\text{Total of the Products}}{\text{Total of the Amounts}}\]
Note: To calculate the number of days, the number of days in every respective month involved are individually considered.
Case 2: When there are Inter-Transactions Between Two Parties
Under this case there is an involvement of more than one party. Here, the first party purchases from a party and sells it to the other. An example of this is Raymond Clothes and Cello Co. Raymond Clothes sells its clothes to Cello for the use of their employees and in return buys pens from them. In this case, they pay the net amount and not the gross amount. Hence, net amount, which is the difference of the amounts is taken into consideration and the earliest date taken for both the parties is the base date.
Case 3: When the Amount is Paid in Instalments
Under this scenario, the amount is to be lent in a single lump sum and the repayment is done in several installments. The steps given below are followed in this case.
The number of days from the lending date to the date of every payment are calculated.
The total number of these days or months or years are calculated.
The quotient would be the total number of days by which the average due date tends to fall away from the loan commencement date.
In case the installments are the same, simple mean concept is used wherein the days are divided by the total number of products.
Formula:
\[\text{Average Due Date = Date of Loan } \pm \frac{\text{Sum of days/Months/Years From the Lending Date to the Installment Repayment}}{\text{Total Number of Installments}}\]
Case 4: To Calculate the Average due Date to Calculate Interest on the Drawings
When there are drawings, the owner tends to draw the amounts from the businesses of different dates but can settle them on a single date. If different amounts are due on various dates but settled on a single date, the interest gets calculated with the help of the average due date method.
Solved Example
Example:
Determine the Average Due Date from the Following Amounts.
Solution:
Considering that 3rd April is the starting day, a table is prepared as follows:
FAQs on Average Due Date: Meaning, Calculation, and Applications
1. What is a 'due date' in the context of business accounting?
In business accounting, a due date is the specific, final date by which a payment for a debt, invoice, or bill must be made. Settling an amount after this date means it is overdue, which can lead to penalties or the charging of interest as per the transaction's terms.
2. What is the meaning of Average Due Date (ADD)?
The Average Due Date (ADD) is a calculated mean or equated date on which a single, consolidated payment can be made to settle multiple transactions with different due dates. The key principle is that this settlement occurs without any financial loss to either the debtor or the creditor in terms of interest.
3. What is the formula used to calculate the Average Due Date?
The formula to determine the Average Due Date is based on a selected base date and the weighted average of the transaction amounts. The formula is:
Average Due Date = Base Date + (Sum of Products / Sum of Amounts)
Where:
- The Base Date is a starting point, typically the earliest due date among the transactions.
- The Product is found by multiplying each transaction's amount by the number of days between its due date and the base date.
4. What is the practical importance of calculating the Average Due Date for a business?
The primary importance of calculating ADD is to simplify financial settlements. When two parties have multiple mutual transactions, ADD allows them to settle their entire account with a single payment on one day. This streamlines the payment process, saves on multiple transaction fees, and provides a fair method that prevents any loss of interest to either party.
5. How is the concept of Average Due Date different from an Account Current?
While both concepts deal with interest calculations over time, their functions are different:
- Average Due Date is used to determine a single, specific date for a lump-sum settlement of various bills without any interest gain or loss.
- An Account Current is a comprehensive statement, like a running ledger account, prepared to show all transactions between two parties over a period. It calculates interest on each individual transaction to find the final balance due on a particular settlement date.
6. What are the consequences if a consolidated payment is made before or after the calculated Average Due Date?
If the payment is not made on the exact Average Due Date, an interest adjustment is necessary:
- If payment is made before the Average Due Date, the debtor is granted a rebate or discount for the number of days paid early.
- If payment is made after the Average Due Date, the debtor must pay additional interest for the number of days the payment is delayed.
7. How should grace days be handled when determining the due date of a bill of exchange for calculating ADD?
According to the Negotiable Instruments Act, 1881, a period of three grace days must be added to the tenure of a bill of exchange (e.g., a bill payable 'after date' or 'after sight') to determine its legal due date. This final legal due date is the one used in the calculation of the Average Due Date. It's important to note that bills payable 'on demand' do not get any grace days.
8. In what business scenarios is the Average Due Date method most useful?
The Average Due Date method is particularly useful in scenarios involving a series of mutual financial dealings. Common examples include:
- Settling multiple invoices between a single buyer and seller who transact frequently.
- Calculating the settlement date for partners' drawings from a firm, which are made on different dates throughout the year.
- When a single debtor has accepted multiple bills of exchange with different maturity dates drawn by the same creditor.
