An Account Current is a statement of transactions which represents running transactions between parties. We prepare Account Current for a specific period of time. It includes interest received or charged on transactions. There are two parties involved, one who prepares the Account and the other for whom the account is prepared.
Methods of Preparing an Account Current
We prepare the Account current in the following situations:
- When frequent transactions regularly take place between two parties, they prepare Account current.
- In the case of consignment, consignee prepares it.
- When frequent transactions occur between Bank and customers.
- In case of a joint venture and each co-venture is entitled to interest.
Method 1: Account Current with the help of Interest Tables.
This method is also known as Individual Method. According to this method, we arrange all the transactions in the form of a ledger account. There are two more columns on both the sides of the account. One column represents the number of days counted from the due date of each transaction to the date of rendering the account. In the absence of the due date of payment, we assume the date of the transactions to be the due date. While the other column represents interest.
With the help of these tables, calculate the interest due on different amounts at given rates for different periods of time and enter it against each item. Total the interest columns of both sides. The difference is the balance.
Method 2: Account Current by means of Products.
This method is also known as the Product Method. In this method, the way of preparing the Account Current is the same. Only the method of calculating interest is different.
In the previous method, we prepare interest column on both the sides of the Account Current and take interest in respect of each item from the interest tables. In this method, in place of the interest columns, we prepare “product” columns.
The product, in this case, is the amount multiplied with the number of days for which it has been outstanding. In other words, with a view to converting the period of each transaction to one day, we multiply the amount by the number of days. Thus, we enter the resultant product against each transaction of the product column. The remaining steps are given as follows:
- Find out the balance of the products on both sides.
- Calculate interest at the prescribed rate on the balance of the products for a single day.
- Enter interest on that side in the amount column on which the balance of products appears.
Method of Computing the numbers of Days
Generally, we use the following two methods for calculating the number of days:
- Forward Method: In this method, the number of days is calculated from the due date of the transaction to the date of closing the account.
- Backward ( Epoque Method): In this method, the number of the days are calculated from the opening date of account to the due date of the transaction.
- Red – Ink Interest: If the due date of a bill is after the date of closing the account, then we charge no interest for that. However, we write the interest from the date of closing to the due date in “Red-Ink” in the relevant side of the ‘Account current’. This interest is known as Red-Ink interest. Thus, we always treat Red-ink interest as negative interest.
In other words, in an account current, we calculate interest on a bill from the date of the transaction to the closing date of the period.
Method 3: Account Current by Means of Product of Balances in case of Banks.
This method is also known as Periodic balance Method. Banks usually adopt this method in the case where it is necessary to take out the balance of the account after each transaction.
In this method, we count the number of days written against each transaction from its date or due date to the date of the next transaction. For the last transaction, count the number of days to the end of the period. Every amount is multiplied by the number of days. If the amount shows a debit balance, the product is entered in the Debit Product column and represents a credit balance, the product is entered in the Credit Product column.
Calculate the total of Debit Product and Credit Product columns. Calculate interest on each total at the prescribed rate of interest. Ascertain Net interest. Show the net interest payable to the customer as “By Interest A/c”, and interest due from the customer as “To Interest A/c”.
Solved Example for You
Q. On 2^{nd} April 2016 Dharmesh opened a current account with the Corporation Bank Limited, and deposited a sum of 50000.
His further deposits are:
15 April | 6000 |
12 June | 9000 |
10 Aug | 14000 |
His withdrawals are:
15th May | 20000 |
10th July | 55000 |
15th September | 12000 |
Show Dharmesh’s a/c in the ledger of the Corporation Bank. Calculate interest at 6% on the debit balance and 3% on credit balance. Prepare the account as on 30^{th} September 2016. Make the calculation to the nearest rupee.
Ans:
Dharmesh’s Current Account with Allahabad Bank Ltd.
Date | Particular | Dr. | Cr. | Dr. or Cr. | Balance | Days | Dr. Product | Cr. Product |
2016 | ||||||||
Apr 2 | By Cash A/c | 50000 | Cr. | 50000 | 13 | 650000 | ||
Apr 15 | By Cash A/c | 6000 | Cr. | 56000 | 30 | 1680000 | ||
May 15 | To Self | 20000 | Cr. | 36000 | 28 | 1008000 | ||
Jun 12 | By Cash A/c | 9000 | Cr. | 45000 | 28 | 1260000 | ||
Jul 10 | To Self | 55000 | Dr. | 10000 | 31 | 310000 | ||
Aug 10 | By Cash A/c | 14000 | Cr. | 4000 | 36 | 144000 | ||
Sep 15 | To Self | 12000 | Dr. | 8000 | 16 | 128000 | ||
Sep 31 | By Interest A/c | 237 | Dr. | 7763 | ||||
Sep 31 | By Balance C/d | 7763 | ||||||
87000 | 87000 | 438000 | 4742000 | |||||
Calculation of Interest:
On 4742000 @ 3% for 1 day = 308.68
On 438000 @ 6% for 1 day = 71.80
Net Interest = 236.87