What is the Average Due Date
The average due date refers to the weighted average of a given number of dates having equal or unequal amounts. It is one equivalent date for various dates so that interest that has to be measured from these respective dates can alternatively be measured from the average due date.
In case a party has to pay various amounts to the same party that are due on different dates and in case they wish to settle the total amount on a fixed date without gaining or losing anything by way of interest is referred to as the average due date. This amount can be due on anything ranging from loans to bills of exchange or any other type of transaction.
What is the Maturity of a Bill?
The maturity of a bill or a transaction refers to the date on which the bill of exchange is due to be paid. For calculating this, an additional 3 days are added as a grace period.
What is the Due Date?
Due date is a date on which transactions such as loan installments, sales, purchases, bills, etc. fall due for the settlement.
How is the Due Date Calculated?
The due date is calculated by adding the bill/credit period on the relevant date + 3 grace days if it is applicable. The relevant dates of bills of exchange can be the date of the bill or the date of acceptance according to the terms of the bill. In other cases, it can be the date of the transaction.
The due date of a bill of exchange is calculated for finding the date on which the payment of the transaction or the bill is due. To calculate the due date of the bill of exchange, the steps given below are followed:
The first step is identifying the start date or the base date, which refers to the date wherein the bill of exchange was drawn.
Then the number of days or months is added after which the bill is due for the payment.
And lastly, an additional period of 3 days is added as the grace period.
What is the Effect of Holidays while Ascertaining the Due Date?
Considering the bills of exchange and promissory notes, in case the due date falls on a public holiday, then the due date is considered as the next working day. Sundays are regarded as public holidays.
If there are any emergency holidays, then the subsequent working day is considered to be the due date.
If transactions other than promissory notes and bills of exchange are considered, the due date can be considered on a working day, which is after the public holiday or the emergency holiday.
Penalties for Overdue Invoices
In most cases, there is a cost associated with failing to make a payment on or before a stated due date. For Example, If you don't pay your credit card bill on time, you'll be charged a late fee, which might be a percentage of the entire amount outstanding.
Late invoice payments may have a significant impact on your cash flow as a small business, hurting your budget and even day-to-day operations. Due dates play an important role in being paid on time.
If a customer fails to pay on time, the first step should be to write a reminder letter. This may be as simple as a few clicks with the correct software, and they'll get a reminder with a link to the original invoice.
A late charge can also be imposed on the invoice after the due date to promote prompt payment. The late fee will then be added to the amount of the original invoice, requiring the consumer to pay both the original total and the late fee.
Maturity Date
The maturity date is the point in time when a fixed income instrument's principal must be returned to an investor.
The maturity date is also the date by which a borrower must repay an instalment loan in full.
The maturity date is used to categorize bonds into three major categories: short-term (1-3 years), medium-term (10 or more years), and long-term (30 year Treasury bonds).
Once the maturity date is reached, the interest payments to investors end since the loan arrangement is no longer in effect.
Important Points to remember
The due date of the first transaction, the due date of the last transaction, or any other due date between the first and the last transaction can be used as the base date/zero date, however, an earlier due date is preferred.
If the due date is a fraction, round it to the next whole number. action can be used as the base date/zero date, however, an earlier due date is preferred.
Always disregard the first day and include the last day when computing the number of days.
A refund is offered if the payment is paid before the due date. If the payment is made beyond the due date, interest will be assessed.
The method for determining the average due date is used if two people sell products to each other on separate dates.
Average Due Date = Base Date ± \[\frac{Total\:of\:the\: Products}{Total\: of\: the\: Amounts}\]
Due Date: The due date is the day on which the sum is due.
Maturity Date: Always estimate the Maturity date after three days of Grace have passed. When there is a holiday on the maturity date, the due date is the following working or business day before the holiday.
FAQs on Average Due Date: Meaning, Uses, and Calculation
1. What is the Average Due Date in accounting?
The Average Due Date (ADD) is a single, consolidated date on which multiple payments, due on different dates between two parties, can be settled without either the debtor or creditor incurring any loss of interest. It is essentially the weighted average of the various due dates, where the weights are the transaction amounts. This simplifies the process of settling numerous transactions.
2. What is the importance of calculating the Average Due Date in business transactions?
Calculating the Average Due Date is important for several reasons, as it simplifies financial settlements and ensures fairness. Its main uses include:
Consolidating Payments: It helps in settling a series of bills of exchange or promissory notes with different due dates through a single payment.
Interest Calculation on Drawings: It is used to calculate the interest on drawings made by partners at various intervals throughout the year.
Settlement of Mutual Dealings: When two parties have transactions where they both owe money to each other (mutual owings), ADD helps in settling the account fairly.
Loan Instalments: It can be used when a loan is given in several instalments, and the repayment is to be made in a lump sum.
3. What is the formula and step-by-step process to calculate the Average Due Date?
The formula to calculate the Average Due Date is:
Average Due Date = Base Date ± (Total of Products / Total of Amounts)
The step-by-step process is as follows:
Step 1: Select a 'Base Date'. This is usually the earliest due date among all transactions to simplify calculations.
Step 2: Calculate the number of days between the Base Date and each individual due date.
Step 3: Multiply the number of days calculated for each transaction by its corresponding amount to get the 'Product'.
Step 4: Sum up all the amounts and all the products separately.
Step 5: Divide the 'Total of Products' by the 'Total of Amounts' to get the number of days to be adjusted.
Step 6: Add or subtract these days from the Base Date to find the final Average Due Date. You add if the sum of products is positive and subtract if it's negative.
4. How is a 'Due Date' different from the 'Average Due Date'?
A Due Date and an Average Due Date serve different purposes. A Due Date is the specific calendar date on which a single bill or invoice must be paid. In contrast, the Average Due Date is not a date for a single transaction but a calculated mean date for settling multiple transactions at once, ensuring that neither party loses out on interest that would have accrued over the different time periods.
5. When calculating the Average Due Date, why is a 'Base Date' selected and does its choice affect the final answer?
A 'Base Date' is selected as a common reference point from which the number of days to each transaction's due date is calculated. It is a crucial part of the calculation method. While you can technically choose any date as the Base Date, the choice does not affect the final Average Due Date. The calculation self-adjusts. However, selecting the earliest due date among the transactions is a common practice because it ensures all day counts are positive, which simplifies the multiplication and summation steps.
6. How do you determine the due date for a bill of exchange before starting the Average Due Date calculation?
To determine the due date of a bill of exchange, you must first identify its type. For a bill payable 'after date', the credit period is added to the date the bill was drawn. For a bill payable 'after sight', the period is added to the date of acceptance. As per the Negotiable Instruments Act, 1881, you must add 3 days of grace to this date. For example, if a bill dated January 1 is payable 30 days after date, its due date would be January 31 + 3 days of grace = February 3.
7. What happens if the calculated Average Due Date falls on a public holiday?
If the calculated Average Due Date happens to be a public holiday, the due date for the settlement becomes the preceding business day. For instance, if the Average Due Date is August 15th (a national holiday in India), the legally recognised due date for payment would be August 14th. This rule ensures that financial obligations are met on a working day without delay.
