Red Ink Interest
Some times the due date of a transaction falls after the closing date of the account current. For example, an account current is prepared for the quarter ending 31st March, 1989. A receives a bill or exchange from B for Rs 10,000 on 15th March due one month after date. The due date of the transaction is therefore 18th April, 1989 i.e., 18 days after the closing date of the account current. A on 31st March is entitled to get interest from B for 18 days instead of allowing interest to him for this transaction. In the statement to be rendered by A to B the product of 1,80,000 will be subtracted from the total of the products of other items. In order to differentiate it from other products, the product of such an amount is entered in red ink. This is the reason why such a product is known as “red ink interest” product.
This method is the reverse of the first two methods. Interest is computed from the opening date Of the account current to the date of each transaction. Thus, no interest is charged on the opening balance while interest for the whole period will be charged on the closing balance.
Interest is calculated at the agreed rate on the balance of the products for one thy (or month) and entered on the side which has smaller product In case rates of interest are different for debits and credits, interest for each side will have to be calculated separately.
Periodical Balance Method
The method isusually followed in banks. The balance is struck after each transaction and is multiplied by the number of days up to the next transaction. Interest is charged for one day on the difference of the products. In case the rates of interest are different for debits and credits interest will be calculated for the debits of the products and the credits of the products separately. The difference of the two amounts will be the amount of interest chargeable to or receivable from the party concerned.