Interest Calculation in Tally

Interest Calculation

Interest is the return out of investments or chargeable expenses or income out of the loan taken and also for the delay payment and vice versa. Interest is an amount charged to the borrower for the privilege of using the ledger’s money.

Types of Interest:

        1.   Simple Interest:

            Interest is calculated on principle amount at a specified rate for a specified period.

For Example principle amount is  ₹..50,000/- and the rate is 10% for 2 years, the  interest amount can be calculated as follows.

For1st, 2^nd year interest will be ₹.5000/-.

Amount for 2 year is the same .i.e. ₹.5000/-.

 

    2. Compound Interest:

            Interest is calculated on principle amount and interest accrued but not claimed.

Compound interest is when interest is earned not only on the initial amount invested, but also on any interest

For Example principle amount is  ₹..50,000/- and the rate is 10% for 2 years, the  interest amount can be calculated as follows.

For 1st year interest will be ₹.5000/-.        (Interest calculated for only principle amt)

For 2^nd year interest will be ₹.5500/-.        (Interest calculated for principle amt + interest of 1^st year)            (50000 x 11%)

Basic of interest Calculation:                     

    a): On outstanding balance amounts:

            Interest calculation on outstanding balance is allowed for any ledger account like loan account, debtor’s account, creditors account and bank account etc.,

    b). On Outstanding Bills/invoices/Transaction:

            Interest calculated for each transaction – by – transaction,

            e.g sundry debtors, sundry creditors. This mode is possible for the ledger with the feature of bill wise details.

Style of Interest:

                     i. 30 days a month:

            Interest will be calculated by considering the interest period as 30 days for every  month.

                       ii. 365 days year:

           Under this style interest will be calculated for 365 days for every year even though the year has 366 days in case of leap year.

                      iii. Calendar month:

            Interest will be calculated based on the days of particular month, which will very for every month. In case of  January, interest will be calculated for 31 days and 28 days in case of February.

                    iv. Calendar Year:

            Interest will be calculated based on the days of particular year, which will very for every year. 

Mode of Interest:

        1.      Simple mode applicable for single rate of interest for particular period. Under this                mode  rate of interest period of interest will be fixed.

        2.      Advance mode to get different rate of interest for different period.

Choice of balances:

Choice of balances for which the interest has to be calculated from the Interest Balances list in the On field. The balances are All Balances, Credit Balances only and Debit balances only. Interest can be calculated on all outstanding balances, whether debit or credit. You would like to select only credit balances in case of accounts like Bank accounts, if you want to know the interest that the bank might charge on overdrawn balances.

      Rounding Method:
a) Normal Rounding – Round off the calculated value to the Nearest lower  number that is a multiple of the rounding limit specified if the decimal value is less than 0.5. For example, if the invoice value is 125.30, the value will be rounded off to 125, and the round off ledger will have the value (-)0.30.
Nearest higher number that is a multiple of the rounding limit specified if the decimal value is more than or equal to 0.5. For example, if the value is 125.60, it will be rounded off to 126, and the round off ledger will have the value 0.40 (when the Rounding limit is set to 1).
b)   Upward Rounding – Round off the invoice value to the nearest higher number that is a multiple of the rounding limit specified. For example, if the calculated value is 125.30, the value will be rounded to 126.
c)      Downward Rounding - Round off the invoice value to the nearest lower number that is a multiple of the rounding limit specified. For example, if the calculated value is 125.30, the value will be rounded off to 125.
       d)   Not Applicable:
It is equivalent to normal rounding with rounding limit.

Example:

Calculate the Interest for the following :

1.     Outstanding Value for Suresh debtor is ₹.50,000 and the rate of 10% for year

 

2.      On 1.4.2020 the opening balance loan was ₹.2,50,000/- in the IOB bank at the rate of 15% with the Rounding value is normal and the period was April 2020 to May 2020.

12 % interest for June 2020 to August 2020 Rounding is Upward.

And 10 % for remaining months with the Rounding is downward.

(Rounding limit for all is 1) 

To know how to do: 

 Interest Calculation in Tally