Accounting & Bookkeeping & Small Business Forum

[Barney]

Does anyone know why the program access a wrong finance charge.

Example

Original Invoice = $100.00
Annual Finance Charge = 18%
1.5% per month

Finance charge should be $1.50
QBooks calculates it as $1.53

Has anyone had this happen, and do you know why?

[benjonusa]

It calculates it that way because the 18% interest rate is actually divided by 365 not 12. Then if the month has 31 days the daily rate is 0.015288. Multiply 100 by 0.015288 (rounded) that's where your $1.53 comes from.

Ben Jones
www.prodigyaccounting.com

[benjonusa]

Just to correct, the daily rate is 0.000493 not 0.015288. 0.015288 is the monthly rate for 31 days.

Ben Jones
www.prodigyaccounting.com

[Barney]

Ben,

Thank you so much for the response to my question.

So, I am safe in using that calculation for my charges?

Do you think it would be better to go back and add it to the original invoice?

I have to go back through all invoices over 30 days and charge them for each month that they have not paid.

This was something that the owner has made all overdue clients aware of. The idea was to get them to pay before 01/01/07 and if they did not they would incur these finance charges.

I guess what I am asking is how would you proceed.

I respect your opnion on this.

Thank you,

Barney

[benjonusa]

Hello Barney,

As far as your calculation goes, it all depends on how the client informed their customers of the finance charge structure. The difference in amounts with the two calculations in question are very small and you are safe with either. Financial institutions use the exact same method as QB in most cases to calculate their finance/interest charges. It would be prudent to disclose how the finance charges are assessed to the customer to CYA.

Ok, with regards to going back and adding the finance charges. That is the incorrect way to handle the situation and one of the drawbacks of QB (in that you CAN do it if you want). To keep everything clean and up to standard, simply assess finance charges to the overdue invoices by using the built in finance charge function in QB. A quick way is to open the invoice(s) in question, right click on it and select "assess finance charges". It's very simple from there.

Hope this helps.

Ben Jones
www.prodigyaccounting.com

[Barney]

Very Helpful.

Thank you for your help.

Yes, I will be using the finance charge option in QB. It also shows it on the statement that the client receives as an actual Finance Charge.

Would you do your finance charges once a month on the 1st? Because we do weekly invoicing and if we do finance charges on the first some clients may be getting a finance charge for more than 30 days.

Any opinon on that issue?

If not, you have been a great help to me already.

Thank you,

Barney

[benjonusa]

I rarely use finance charges for my own company as I use automatic billing but for companies I have worked for in the past and for the few overdue receivables I do have, statements are sent out on the last day of the month along with new invoices (in your case the last weekly invoice) and charges are calculated accordingly. As far as some customers having more in charges, I don't see a worry there.

The way I do it is - print an aging summary at the end of the month, circle all of the overdue invoices meeting the criteria I set for creating finance charges - create the finance charges - send out the finance charge (optional) with the new invoice and statement on the next billing cycle.

Ben Jones
www.prodigyaccounting.com

[Barney]

Yes Ben,

That makes total sense to me.

I will access finance charges for all invoices over 30 days as of January 1, 2007.

Then access them on a 1st of the month basis thereafter.

It would be a lot of work to go in on a weekly basis and acess finance charges. I agree with you, once a month should do it.

Thank you,

Barncy