Average Due Date Formula
Talking about the current scenario of businesses, there are a great number of payments and receipts that get involved even if it is related to just one party. And all these may or may not occur at the same point of time. For simplifying the interest calculations that are involved in these transactions, methods like calculating the average due date come very handy. According to this concept, the person clears their dues on a specific date in such a way that neither the creditor nor the debtor suffers any kind of gain or loss by way of interests. This date is referred to as the average due date or ADD.
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Meaning Calculation of Average Due Date in Various Situations
Average due date is usually used in situations as mentioned below.
To calculate the interest of the drawings of partners.
To settle accounts between agent and principle.
To settle contra accounts wherein parties sell product to one another.
To make a lump sum payment against several bills that are drawn on varying dates with different due dates.
Average Due Date= Base date ± \[\frac{\text{Total of the Products}}{\text{Total of the Amounts}}\]
Case 1: When Just one Party is Involved
According to this Method, the Average due date is Calculated in the Following Manner.
1. The first due date is taken as the starting day or O day or base date.
2. The number of days from the base date are counted up to every due date.
3. Then the number of days are multiplied by the amounts.
4. The amount and the products are then added.
5. The product total is divided by the amount total and the result obtained is approximated to a whole number.
6. The number of days are added to the base date for finding the average due date. Hence, the average due date formula is given by:
Average Due Date= Base Date ± \[\frac{\text{Total of the Products}}{\text{Total of the Amounts}}\]
Note: To calculate the number of days, the number of days in every respective month involved are individually considered.
Case 2: When there are Inter-Transactions Between Two Parties
Under this case there is an involvement of more than one party. Here, the first party purchases from a party and sells it to the other. An example of this is Raymond Clothes and Cello Co. Raymond Clothes sells its clothes to Cello for the use of their employees and in return buys pens from them. In this case, they pay the net amount and not the gross amount. Hence, net amount, which is the difference of the amounts is taken into consideration and the earliest date taken for both the parties is the base date.
Case 3: When the Amount is Paid in Instalments
Under this scenario, the amount is to be lent in a single lump sum and the repayment is done in several installments. The steps given below are followed in this case.
The number of days from the lending date to the date of every payment are calculated.
The total number of these days or months or years are calculated.
The quotient would be the total number of days by which the average due date tends to fall away from the loan commencement date.
In case the installments are the same, simple mean concept is used wherein the days are divided by the total number of products.
Formula:
\[\text{Average Due Date = Date of Loan } \pm \frac{\text{Sum of days/Months/Years From the Lending Date to the Installment Repayment}}{\text{Total Number of Installments}}\]
Case 4: To Calculate the Average due Date to Calculate Interest on the Drawings
When there are drawings, the owner tends to draw the amounts from the businesses of different dates but can settle them on a single date. If different amounts are due on various dates but settled on a single date, the interest gets calculated with the help of the average due date method.
Solved Example
Example:
Determine the Average Due Date from the Following Amounts.
Solution:
Considering that 3rd April is the starting day, a table is prepared as follows:
FAQs on Meaning, Calculation of Average Due Date
1. What Do You Mean by a Due Date?
Ans: According to the business context, the due date refers to the latest payment that is made on a debt or an invoice before it gets overdued.These due dates arise in several different number of contexts in the business world. However, essentially, it tends to boil down to whenever a payment is made before it gets late.
Due dates are found on invoices, on credit card payments, and on loan payments. These are the dates which indicate the expected payment and can also result in a different number of penalties if in case the due date passes and the payment is not made.
2. Define Average Due Date.
Ans: The average due date is known as the equated or mean date on which a payment is made in lieu of several payments that are due of several different dates without any kind of interest for both the parties that are involved. Consider, for example, that a businessman has done a series of transactions that involve payments and receipts of money that are due to different dates with the other businessman. They might decide to settle their accounts on a fixed date after considering the amount of the interest that would have become due by a party to the other.