Calculating Finance Charges
Finance charges are applied on a per overdue day basis. The system calculates the number of days for which the open item is overdue, and applies a percentage of the open item total for each overdue day.
The formula for calculating finance charges is:
Open Amount x (Overdue Days/365) x% Interest Rate
This calculation is applied to each open item in turn. The open amount is the total amount of the open item minus any credit to be applied. The overdue days are determined using the credit terms, as of date, and grace days you apply to this finance charge. You then set the Interest Rate Per Annum % value and enter a minimum finance charge amount. The system calculates a finance charge for each open item, and creates a finance charge invoice for the total of these charges.
The finance charge invoice has the following postings:
The Sales Finance account is found from the Finance Charge profile specified on the Customer Accounting tab.
Finance Charge Example
You post two invoices and a credit note for Customer A during the month of August, without matching the credit note against either invoice. Customer A has a credit term of 30 days.
• Invoice I001 for $1000 is posted on 1 August and has a due date of 31 August.
• You post Invoice I002 for $1500 on 8 August, giving a due date of 10 September.
• You also post a credit note CN001 for $500 for this customer on 8 August, which is also due on 10 September.
A number of other invoices sent to Customer A are contested, and you have associated the invoice status code Contested with these open items.
You also have a number of long-term hire-purchase agreements with Customer A with specially negotiated repayment terms. These agreements exist in the system as overdue invoices created using the invoice status code HP.
You create a finance charge on 12 September and set a grace day period of 3 days, a minimum charge of $10, and an interest rate of 10%.
To prevent the system from including the contested invoices, you enter Contested for the Contested Status field. To prevent any unapplied credit being applied to the hire-purchase agreements, you enter HP in the Unapplied Credit Exclusion Status field.
You retrieve all open items for Customer A. These consist of:
Item Reference | Amount | Due Date |
I001 | 1000 | 31 August |
I002 | 1500 | 10 September |
CN01 | –500 | 10 September |
The As Of Date for this finance charge is 12 September. Invoice I001 was due on 31 August and the grace days period of 3 days has elapsed. Therefore, the amount to which you apply finance charges is $1500 and the number of overdue days is 12.
Invoice I002 was due on 10 September. This is within the grace day period of 3 days, and the invoice amount of $1500 is not subject to finance charges.
The system applies CN01 as a credit for $500 on the outstanding amount for this customer, which is $1500. Once the credit is applied, the total open amount for finance charges is $1000.
In this example, the open amount is $1000, the overdue days value is 12, and the interest rate to be applied is 10%: The calculation is therefore:
$1000 x 12/365 x 10% = $3.29
The system creates a Finance Charge invoice for $3.29 for Customer A.
Draft Finance Charges
Finance charges can be saved in draft format when Draft Instances is selected in System/User Settings, Change System Setting. When you save a record in draft format, none of the system validations are executed. You can then return later to complete the record by choosing the Finance Charges Browse Drafts activity and selecting the record you want to finish from the list. For more information on drafts, see
Introduction to QAD Enterprise Applications User Guide.