AVERAGE DUE DATE
Avenge Due Date may be defined as the mean or equated date on which one payment may be made in lieu of several payments due on different dates without loss of interest to either party. For example, A, a businessman may have a series of transactions involving receipts and payments of money due on different dates with B, another businessman. They may decide to settle their accounts on a particular date, after taking into account the amount of interest which may have become due by one party to another. There are two alternatives available in such a case:
(a) Interest may be calculated separately for each transaction; or
(b) A mean date may be determined and the interest may be calculated from such mean date to the date of actual scttlement on the total amount due by one party to another.
Alternative (a) is preferable since it will reduce a lot of clerical work. The mean date so calculated is termed as the Average Due Date.
Utility of Average Due Date
Average due date is useful in the following types of accounting problems:
1. Problems relating to settlement of accounts involving a series of bills of exchange due on different dates.
2. Problems relating to calculation of interest of partners’ drawings made on different dates.
3. Problems involving piece-meal realisation of assets during the partnership dissolution.
4. Problems involving settlement of accounts where money advanced is to be received in a number of installments due on different dates.
Types of Problems
Broadly the problems relating to computation of the Average Due Date, can be put into two categories:
(I) Calculation of Average Due Date when the amount is lent in a number of instalments and repayment is made in one instalment; and
(11) Calculation of Average Due Date when the amount is lent in one instalment and repayment is made in a number of instalments.
Each of these types of problems have been exhaustively explained in the following pages.
(1) Where the amount is lent in a number of instalments
The calculation of the Avenge Due Date in this case can be done by taking the following steps:
1. A certain convenient basic date (or zero date) is taken as a starting point. This is usually the date of one of the transactions and preferably the due date of the first transaction.
2. Tn respect of each transaction, the number of days (or months) filling in between the basic date and date of the transaction are ascertained.
3. The amount of the transaction is multiplied by the number of days (or months) ascertained by step 2 above.
4. Both the products as ascertained by step 3 above as well as the amounts are added up.
5. The total of the products is divided by the sum total of the amount.
6. The result is the number of days (or months) by which the Avenge Due Date is distant from the chosen date. In other words the basic date + number of days (or months), calculated in this way will give Avenge Due Date.
In case some amounts have been paid out and some have been received, the products for the two should be added up separately. The difference between the two totals of the products should then be divided by the difference in the sum total of the amounts of Debit and Credit However, it should be noted that the basic date for both group of transactions should be the same.