How is Compound Interest Calculated on a Bill
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The Interest and Reminder Statements has to be Enabled. The options to send Reminder Statements and charge interest can be set on Bill Profiles, and overridden in individual Files.
Specify a grace period and threshold AR balance for posting interest and creating mass Reminder Statements.
- For a Bill not fully paid by the end of the Grace Period, choose whether interest starts to accrue as of the Invoice Date or the end of the Grace Period.
- Choose whether interest should be posted to AR or merely appear as a memo item on Bills and Reminder Statements. This affects interest charged from this point forward. If posting interest, only simple interest may be applied.
- The stored Interest Rates are listed, the most recent first. For each Rate, the date that it applies and the annual percentage are shown. To create a new Rate, click New and enter information. Interest on an outstanding Bill is charged at the rate that corresponds to the AR date of the Bill.
- Select the frequency with which interest is calculated: Simple, Compounded Monthly, Compounded Annually, etc. If you chose that interest should be posted to AR, only Simple interest may be used.
Compound Interest is calculated on the outstanding balance plus accrued interest, as P (1 + r/n)nt, where:
P = principal amount (balance outstanding on Bill)
r = annual nominal interest rate (as a decimal)
n = number of times interest is compounded per year
t = number of years
For example, a Client has an outstanding Bill for $1,500, the Interest Rate is 10%, and the Compounding Frequency is Quarterly. If the Bill is 96 days overdue (calculated from the Invoice Date), then the interest is
1,500 (1 + 0.10/4)4 × 96/365 = $39.48.