Account Current – CA Foundation, CPT notes, PDF

This article is about Account Current for CA foundation CPT students. we also provide PDF file at the end.

Account Current

What we will study in this chapter: We will study how an Account Current Statement is prepared and how concept of product is used for interest calculation.

INTRODUCTION

Write short note on Account Current. (Nov. 2005, May 2008)

♦   Account Current is a statement rendered by one party to other giving details of transactions with that party together with the details of interest calculation. It is prepared just like an account by providing additional columns for interest calculation on both sides i.e., debit & credit sides.

♦   Account current serves the purpose that not only the other party can verify transaction but also the interest calculations. It is prepared for a particular period.

20.1   IS STATEMENT OF ACCOUNT AND ACCOUNT CURRENT THE SAME THING?

♦   No, Statement of account is simply the copy of ledger account of a person in our books sent to him for confirmations of correctness.

♦   Account current is a statement prepared in the pattern of ledger account containing details of all transactions with that party with additional columns to give details of interest calculation.

20.2    WHAT ARE THE ALTERNATIVES FOR PRESENTING ACCOUNT CURRENT?

♦   It can be prepared in the following 3 ways:

(a)      Account current by products of each transaction method (it is most common).

(b)     Account current by product of balance method. (It is followed by Banks etc.)

(c)       Account current prepared with the help of Interest tables.

20.3    EXPLAIN THE PREPARATION OF ACCOUNT CURRENT BY EACH OF THE THREE METHODS

20.3.1   Explain the preparation of Account current by product of transaction method

1. It is prepared in T pattern that is with debit-credit as two sides and balanced at the end of that period.
2. It is simply the account of that person in our books.
3. Prepare account as usual by debiting the account whenever that person is receiver and crediting the account whenever that person is giver.
4. Mention due date of each of debit and credit items.
5. Days are calculated from the due date of each transaction (item) to the period end, in both debit and credit sides.
6. Days are multiplied with the respective amount to calculate products.
7. Interest is recoverable on total of product of debit side and is payable on total credit products for one day. Alternatively interest can be calculated for net products.

Account Current by Product of Transaction Method

Illustration 20.1:

(June 1995) From the following information, prepare account current on 30th September, 2011 to be submitted by M to F.

Interest is to be taken into account @ 10% per annum; it may be calculated to the nearest rupee. Solution:

Steps for preparation

1. Prepare a/c. of ‘F’ in our (M’s) books (i.e. entity is M) in usual way but keeping three extra columns on both debit and credit side.
2. Date of transaction itself will be taken as due date unless information about credit period etc. is given. Suppose in above case it is mentioned that on sales we allow one month credit to ‘F’ then sale of 5.7 will have due date as 5.8 and so on.
3. Days are from the due date to the end of account current period i.e. 30.9.2011 in this case. For 1.7.2011 opening balance is 31 days of July + 31 days of August and 30 days of September = 92 days are taken. Opening balance of 1.7 is in fact balance from 30.6.2011, hence even 1st July is included. But suppose there is sale on 1.7.2011 then days will be = 30+31+30=91 days that means 1st July transaction’s 1 day will be completed on 2nd July and so on. Or in other words ignore the date of transaction/due date.
4. Product is multiplication of amount with respective days.

Account current rendered (sent/submitted) by ‘M’ to ‘F’ or

‘F’ in Account current with ‘M’

For the period 1.7.2011 to 30.9.2011

Interest = 15,38,700 ×  ×  = Rs. 422

Entry → F a/c Dr.                    422

To Interest a/c                                     422

20.3.2 Explain the preparation of Account current by product of balance method

1. It is simply the account of that person in our books.
2. Prepare account as usual by debiting the account whenever that person is receiver and crediting the account whenever that person is giver.
3. It is prepared in debit, credit and balance pattern, (Bank Pass book type).
4. Wherein after every entry, new balance is calculated (transactions get merged and result into new balance each time).
5. Here due date of each transaction must be same as date of transaction otherwise this format will not work.
6. Days are calculated for each balance (debit or credit) from the date of previous balance to the date of this balance.
7. Days are multiplied with the respective amount of balance to calculate products.
8. Product will be debit product if balance is debit and it will be credit product if balance is credit.
9. Interest is recoverable on total of debit product and is payable on total of credit products for one day. Alternatively interest can be calculated for net products.

Account Current by Product of Balance Method (Pass book style)

Illustration 20.2: From the information given in Illustration 20.1, prepare account current on 30th September, 2011 to be submitted by M to F by Product of balance method.

Solution:

Steps for preparation

1. Prepare a/c. of T’ in our (M’s) books in passbook style or vertical pattern and with extra columns for days and products.
2. Days for a balance means for how many days that balance was in existence. For this the effect of a transaction on the balance is considered from the next day. (In previous method you have seen that for transaction of 5.7 one day will be completed on 6.7 and so on).

For 1.7.2011 balance days are from 1.7.2011 (including it) to 5.7 — 5 days For 5.7.2011 balance days are from 6.7.2011 (including it) to 15.7 = 10 days

3. Debit balance multiplied by days will be debit product and credit balance multiplied by days will be credit product.

Special note: When the date of transaction and due dates are different then this method cannot be applied. Because on the date of transaction itself the balance will get changed, whereas it is not yet due, hence its effect for interest should come from due date and not from date of transaction.

Account current rendered (sent/submitted) by ‘M’ to ‘F’ or

T’ in Account current with ‘M’

For the period 1.7.2011 to 30.9.2011

Net product on which interest is recoverable = 15,40,500 – 1800 = 15,38,700

Interest = 15,38,700 × × = Rs. 422

Entry → F a/c              Dr.       422

To Interest a/c             422

20.3.3 Explain the preparation of Account current by interest table

1. In either of the above case if instead of calculating product, the interest is calculated from interest table and written in the account current it will be known as Interest table method.
2. Viewing interest table for each item may be more time consuming and error prone for students.
3. Alternatively products are calculated and then interest from interest table is calculated instead of on calculator.

Special Note: This may not be asked in the exam, otherwise they will have to provide interest table. But even if it is asked a student can calculate interest with the help of calculator (on the corresponding amount for respective days at the specified rate) and write in place of products. Total it to get interest recoverable (debit side) and interest payable (credit side) and then net it.___________________________________

20.4  IS THERE ANY SPECIFIC PERIOD FOR ACCOUNT CURRENT?

♦ No. It is decided mutually by the parties concerned. Interest is calculated for a specified period say quarterly, 6 monthly or annually on all the transactions of that period.

♦ The interest so calculated either payable or recoverable is accounted in that a/c. at the end of that period.

20.5 HOW ARE THE DAYS COUNTED FOR CALCULATING PRODUCTS IN ACCOUNT CURRENT?

♦ Normally the days should be counted from the due date of transaction to the last date of that period. In case of bills of exchange the due date should be taken as starting point and not the date of accounting, similarly in case of sale-purchase the Invoice date should be considered.

♦ If credit period is given then due date should be calculated. Whenever due date is not given the date of transaction itself will be taken as due date for calculation of days.

Illustration 20.3: Due date is 10.1.04 and period ends on 31.3.04. Calculate days.

Solution:

Then the days will be II days of January 4- 29 days of February + 31 days of March i.e. total 81 days.

Illustration 20.4: From the following particulars, calculate days for preparing an account current by product of transaction method as on 31st March, 2011  ‘

Solution:

Calculation of Days (from the due date to the end of the period i.e. 31,3.2011)

*For opening balance 1st Jan will also be counted because in effect it is brought from 31st December.

**It is bill of exchange hence 2 month + 3 days of grace are added.

***From 29th Jan 1 month will be completed on 29th Feb but because Feb 2011 do not have 29 days hence last date of the month that is 28th Feb is taken.

20.6 WHY ONE DAY INTEREST IS CALCULATED ON THE PRODUCTS?

♦ Interest is calculated on a certain amount for a certain period. The product is the multiplication of the two things, that means the relevant number of days has already been multiplied, hence now on product only 1 day interest is calculated.

♦ (Student will be knowing it that days say 30 × 1 = 30 but 30×0 = 0 that means by multiplying with one we are not changing any value) e.g. 10 days interest on Rs. 5,000 will be same as calculating 1 day interest on Rs. 50,000 (i.e. 10 × 5,000) at a given rate of interest of say 3% per month, i.e. interest = Rs.50 as follows:

Rs. 5,000 ×  ×   = 50 or Rs. 50,000 ×  ×  = 50

Illustration 20.5: From the following particulars, of an account current to be rendered by A to B as on 31st March, 2011, calculate interest @18% p.a.

Solution:

Product is the multiplication of amount and days thal means the corresponding days for which interest was applicable on the said amount has already been multiplied hence now interest for only one day is calculated on the aforesaid amount of product.

Calculation of Interest from Account Current

Interest = 3,19,400 × ×

Entry: 31.03.2011 B’s A/c       Dr.       158

To Interest A/c                                    158

20.7 HOW INTEREST RECEIVABLE OR PAYABLE IS DECIDED?

♦ Debit items or debit balance in a personal account means recoverable from him (i.e. our money is with him) and hence for any delay interest is recoverable from them. Thus, on debit product interest is recoverable.

♦ Likewise credit items or credit balance in a personal account means payable to him (i.e. his money is with us) and hence for any delay interest is payable to them. Thus on credit product interest is payable to them.

Interest is recoverable on debit products for (1) day and payable on credit products for (1) day.

20.8  WHAT IF DIFFERENT RATES ARE APPLICABLE FOR INTEREST RECOVERABLE AND PAYABLE?

♦ If the rate for interest recoverable and interest payable is different then net products are not to be calculated.

♦ Interest will be calculated on debit products at the interest recoverable rate, and on credit products interest will be calculated at payable rate. Although it is not common.

♦ If it is stated that rate on debit balance and on credit balance are different, then account current by product of balances method will have to be prepared and then apply respective rates to debit products and credit products. In this case account current by product of transaction method will not be correct.

20.9 WHAT IS RED INK INTEREST?

In Account current Red ink interest is treated as negative interest. True or false (May 2003) [Answer: True] The interest charged by Banker to customer on overdrawn Account is called Red ink interest. True or false (Nov. 2005) [Answer: False]

Write short note on Red ink interest. (May 2004, Nov. 2007)

♦ In account current interest is calculated on every transaction from its due date to the end of that period. When the due date is not given the date of transaction itself will be taken as due date.

♦ In case the due date falls beyond the end of that period, then no interest is to be given on it upto the period end.

♦ But the negative interest (opposite interest) from the end of period to the due date should be calculated, & written in red ink on the side of transaction so that this Red ink products will be deducted from the other products of that side, OR alternatively to give this effect this products can be written by the same ink but on the Opposite side of that transaction.

♦ Ex. Account current is for the period 1.1.04 to 31.3.04. Due date of a particular transaction is say 20th April, then the red ink days (opposite days /negative days) will be 20 days.

Illustration 20.6: Following are the transaction between Sanjay and Ravi. Both allows one month credit to each other on sale/purchases.

Prepare an account current of Sanjay with Ravi upto 31.12.03 reckoning interest @14% p.a. on the balance due. Solution:

Account Current by Red Ink Interest method.

It is simply adjustment of interest effect on those items which fall due beyond the cut off date (last date) of the Account current. To adjust it opposite effect needs to be given now. Which can be indicated by minus sign or by writing on opposite side as contra product or by writing by red ink hence the name red ink interest method.

Special Note: For transactions of April 20 & June 16, Invoice date is also given. For calculating due date we have added 1 month credit period to the date of transaction, alternatively 1 month can be added to the date of invoice.

Product of Transaction Method (Red Ink Interest Method)

Sanjay in Account Current with Ravi for the period 1.1.03 to 31.12.03

Working Notes:

Calculation of Interest

Interest recoverable on 1,18,48,000 – 1,05,30,000 = 13,18,000

Interest = 13,18,000 ×  ×  = Rs. 506

Entry for interest due:                                  Sanjay a/c Dr.             506

To Interest a/c 506

Important points Regarding Due date –

1. When in case of sale, purchase, credit period is given the same will be added to date of transaction to get due date. Where invoice date is given (like in this question) the same will be taken as due date.
2. In case of bill of exchange/promissory note due date will be calculated by adding the period + 3 days of grace.
3. In case of sales/purchase return the due date of sale/purchase should be taken for return also because it is oniy a cancellation entry, hence interest effect should also get cancelled.

Red Interest/Contra Product: When due date of a transaction falls beyond the cut off date (i.e. 31.12.2003 in this case), there are no days from due date to cut off date rather there are reverse or opposite days from due date to cut off date. Such days are either written on same side by (-) sign or in red ink (followed by bank, hence the name red ink interest) or the same effect is created by writing the products on opposite side known as contra product.

20.10 CAN ANY PROBLEM BE TACKLED IN ANY TYPE OF CURRENT ACCOUNT

♦ No. When due date and date of transaction of even one transaction is different, then account current will have to be prepared by product of transaction method.

♦ In product of balance method the transaction as soon as takes place losses its identity and gets merged with balance and hence if its due date is some other date, then that adjustment cannot be made in this format.

♦ Thus product of balance method can be applied only if date of transaction and due date are same for each item. Product of transaction method can be used in any situation.

Illustration 20.7: From the following Prepare account current of A in the books of B as at 30.9.2011 Interest @12% p.a.

Solution:

Product of Balance Method not applicable in this question:

You can observe that there are transaction whose due date are different than the date of transaction, hence product of balance method cannot be applied. Because effect of a transaction on the balance will come on the date of transaction itself when we record it, whereas for interest it should be considered from the due date only

‘A’ in Account Current with ‘B’ (Product of Transaction Method) for the period 1.7.03 to 30.9.03

Calculation of Interest

Net product on which interest is recoverable = 7,64,600 – 3,01,400 = 4,63,200

Interest = 4,63,200 ×  ×  = 152

Entry for interest due:- A’s a/c Dr.                  152

To Interest a/c                                                              152

20.11 EPOQUE OR BACKWARD CALCULATION METHOD

1. In product of transaction method the days are calculated from due date to the end of period.
2. Hence when due date was beyond the end of period we have taken negative days (contra product).
3. In backward method the days are calculated from due date to the starting of period hence the name backward calculation.
4. Ascertain closing balance before interest because product for this balance from closing date to opening date are to be calculated.
5. Product on opening balance will be nil (zero) because product for this balance from opening date to opening date are to be calculated.
6. The only plus point of this method is that even if due dates are beyond cut off date negative/contra days will not come.
7. But while deciding whether interest is receivable or payable the interpretation will be reverse of what you have done in earlier method i.e.

If debit products are there interest is payable and If credit products are there interest is recoverable.

Special note – There is no special benefit of this method. Any problem can be solved by product of transaction method. We don’t recommend it to student. For your information only we are giving illustration by this method also.

Illustration 20.8: (June 1998) The following are the transactions that took place between X and Y during the period from 1st January to 30th June, 2011:

Draw up an account current upto 30th June, 2011 to be rendered by X to Y charging interest at 15% per annum. Solution:

Account Current by Product of Transaction Method

(Epoque/Backward Calculation Method)

Y’s in Account current with X For the period 1.1.2011 to 30.6.2011

Interest recoverable on 3,87,372 – 2,28,904 = 1,58,468

Interest = 1,58,468 ×  ×  = r_s.65

Note: You must have noted that in this case balance before interest is also required to be worked out at the end of the period, product on same is also calculated for 181 days i.e. 1.1.2011 to 30.6.2011.

If you wish to practice, apply it on other questions and compare the result which must be same.

Some Advanced Illustrations

Illustration 20.9: Ram had a bank balance of Rs. 20,700 in his account with SBI on 1.9.2003. His other transactions during the month of September are as follows:

Prepare account current of Ram with SBI on 30.9.03 as per Product of Balance Method assuming interest @15% p.a. Solution:

Account Current by Product of Balances Method

‘Ram’ in Account Current with ‘SBI’ (Ram’s a/c in the books of ‘SBI’)

for the period 1.9.03 to 30.9.03

Working Notes:

Calculation of Interest

Net Interest payable on 4,32,100 – 2,600 = 4,29,500

Interest = 4,29,500 × × = Rs. 177

Entry for interest due:- Interest a/c Dr.           177

To Ram a/c                         177

Explanation:

1. This is passbook i.e. customers a/c in the books of bank exact opposite of bank a/c in customers book.
2. Here days are the days for which that balance exist. For any transaction 1 day is completed on next date like for transaction of 4.9., 1 day is completed on 5.9. Hence upto 4.9 previous balance is considered and 1 day of new balance Rs. 33,700 is counted from 5.9, so on and so forth.

Illustration 20.10: Following transactions took place between X & Y during the months of April, 1999.

You are required to make an account current by products method to be rendered by X to Y as on 30/04/99 taking interest into a/c @ 10% p.a.

Solution:

Product of Transaction Method

Y’s in Account current with X’s

Interest payable on 5,70,000 – 2,52,500 = 3,17,500

Interest = 3,17,500 × ×  = Rs. 87

Special Note: In case of transactions where invoice date is given, but no credit period specified, take date of invoice as the due date.

*This article contains all topics about Account Current.

For notes on all CA foundation topics, you can visit this article CA foundation note