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Principles and Practice of Accounting > Average Due Date > Meaning, Calculation Of Average Due Date In Various Situations
Average Due Date

Meaning, Calculation Of Average Due Date In Various Situations

In the present scenario in business enterprises, there are numbers of receipts and payments involved related to a single party. These may occur at different points of time. To simplify the calculation of interest involved in such transactions, we use the concept of the average due date. In this concept, a person pays all his dues on a particular date, in a manner so that neither the debtor nor the creditor suffers loss or gain by way of interest. This date is the Average due date (ADD).

Meaning, Calculation Of Average Due Date

The concept of Average due date (ADD) is generally used in the following situations:

  • Calculating interest on drawings of partners;
  • For settling accounts between principle and agent;
  • For settling contra accounts e.g. where parties sell goods to each other;
  • Making lump sum payment against various bills drawn on different dates with different due dates$$\text{Average due date} =\text{Base date} \pm \frac{\text{Total of the products}}{\text{Total of the amounts}}$$

Important Points about ADD

  1. Base date/ zero date may be taken as the due date of the first transaction or the due date of the last transaction or any other due date between the first and the last but preferably an earlier due date may be taken.
  2. While calculating the number of days always ignore the first day and include the last day.
  3. If the due date is in the fraction, round it off.
  4. If the amount is paid before the due date, a rebate is given. While, where the amount is paid after the due date, then interest will be charged.
  5. Whenever there is a sale of goods by two persons to each other on different dates, the formula for calculating average due date is      $$\text{Average due date} =\text{Base date} \pm \frac{\text{Total of the products}}{\text{Total of the amounts}}$$
  6. Due date: Due date means the date on which the amount becomes payable.
  7. Maturity date: Always calculate the Maturity date after taking into consideration three days of Grace. Calculation of Due Date when there is a Holiday on maturity day, due date is the next preceding working or business day.

Examples:

  • A bill dated 1st  April is made payable three months after date. Thus, it falls due on the 3rd of July.
  • Due Date=30 June
  • Maturity date= 30 June +3 =3 July

 

ADD

Source: shutterstock

Case 1: Only one Party is involved

In this method, we calculate the average due date as follows:

  • Take the first due date as the starting day or base date or “O” day for convenience. You can take any date as “O” day.
  • Count the number of days from base date up to each due date.
  • Multiply the number of days by the amounts.
  • Add up the amount and products.
  • Divide the “Product total” with “Amount total” and get result approximately up to a whole number.
  • Add the number of days in the base date to find the average due date. Thus, the formula for the average due date is:
  • $$\text{Average due date} =\text{Base date} \pm \frac{\text{Total of the products}}{\text{Total of the amounts}}$$
  • Note: For calculation of no. of days, consider no. of days in each respective month involved individually.

Case 2: Inter-transactions between two Parties

In this case, more than one party is involved. One party purchases from and also sells to another party. E.g.  Raymond Clothes and Cello co. where Raymond Clothes sells clothes to cello for their employees and purchases pens from them. In such a case instead of paying the gross amount they may pay net amount Thus here we take the difference of amount called net amount. In such cases, take the earliest date of both parties as the base date.

Case 3: The amount is paid in Instalments

In this case, the amount is lent in one lump sum and repayment is done in various installments. In such cases following steps will be followed:

  1. Calculate the number of days from the date of lending money to the date of each payment.
  2. Find the total of such days/months/years.
  3. The quotient is the number of days by which average due date falls away from the date of commencement of loan.

As explained earlier, if installments are same, we can use Simple mean concept i.e. divide days by the number of items and there is no need for the product.

Formula: $$\text{Average due date} = \text{Date of Loan}+ \frac{\text{Sum of days or month or years from the date of lending to the date of Repayment of installment}}{\text{Number of installments}}$$

Case 4: Calculation of average due date for calculating interest on drawings.

In the case of drawings, the owners draw the amounts from the business on various dates. They can settle it on one date. When different amounts are due on different dates and ultimately settled on one day the interest is calculated by means of Average Due Date.

Solved Example for You

Q. From the following amounts, calculate Average Due Date.

Amount Due Date
 

1000

1600

2000

 

3rd April

2nd July

11th September

Ans: Considering 3rd April as the starting day the following table is prepared:

Due Dates Amount No. of Days from 3rd July Products
3rd April 1000 0 0
2nd July 1600 90 144000
11th September 2000 161 322000
4600 466000

Average Due Date = 3rd April+ (466000/4600)

= 3rd April+ 102 days = 14th July

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