About overdue charge code definition

Before you start setting up overdue charge codes, you need to perform the following steps:

1. You create the following entities (or determine which existing entities you will use), which you need for collecting and recording the overdue charges:
   • A general ledger account of the income type and a corresponding subaccount (if applicable in your system) to record each overdue charge and each overdue fee, if you plan to charge one. You can use the same account for recording all overdue charges and overdue fees or create separate accounts for each overdue charge and each overdue fee.
     
     For details, see: Add an account to the chart of accounts.
   • Payment terms that provide a schedule for paying overdue charge documents.
     
     The payment terms used for overdue charges should be created without discounts.
     
     You can create just one set of payment terms for overdue charge documents or multiple sets.
     
     For details, see: About payment terms.
2. You plan the overdue charge code or codes needed to suit your company's credit policy.
   
   The planning includes the following for each overdue charge code:
   • Selecting the calculation method to be used with the code
   • Deciding on the amount of the overdue charge
   • Deciding on the amount of the overdue fee, if you plan to charge one
   • Defining the criteria for creation of a document of the Overdue charge type for this code

The following sections provide detailed information about the settings of the overdue charge codes.

The system provides three calculation methods you can use to define the amount that is subject to overdue charges based on the number of days after the due date. The charges can be calculated either for open documents (those that are not fully paid) or for closed documents (those that are fully paid). The base all the methods use for calculation is the open balance of the overdue document.

The figure below and the examples show how interest is calculated when you use the different calculation methods. Note that the examples are in US dollars.

For each overdue charge code, you select one of the following options in the Calculation method field in the Overdue charges window:

• Interest on open entries:
  

The overdue document is subject to charges until it is closed. To calculate the charges for the days past due, the system uses the document’s open balance as of the date of calculation. If overdue charges have been recorded for the document, the system calculates the charges for the number of days since the date of the last overdue charges.

The system calculates overdue charges as follows (the blue lines in the related figure):

1. On the first calculation of charges, the system applies charges to the $500 open entries for 10 days overdue.
2. On the second calculation of charges, the system applies charges to the $100 open entries for 30 days overdue.
3. On the third calculation of charges, the system does not apply charges because the document is fully paid.

• Interest on open, partially paid and paid entries:
  

The overdue document is subject to charges until it is closed. To calculate the charges for the days past due, the system uses the document’s open balance for each of these days. If overdue charges have been recorded for the document, the system calculates the charges for the number of days since the date of the last overdue charges.

The system calculates overdue charges as follows (see the green lines in the figure):

1. On the first calculation of charges, the system applies charges to the $500 for 10 days overdue.
2. On the second calculation of charges, the system applies the sum of charges to the $500 for 12 days overdue, to the $200 for 7 days overdue, and to the $100 for 11 days overdue.
3. On the third calculation of charges, the system applies charges to the $100 for 16 days overdue.

• Interest on paid entries:
  

The overdue document becomes subject to charges the moment it is closed. To calculate the charges for the days past due, the system uses the document’s open balance for each of these days.

1. The system calculates overdue charges when the document is fully paid (the point when the charges are calculated for the third time in the figure).
2. The charges are the sum of charges applied to the $500 open balance for 22 days overdue, to the $200 open balance for 7 days overdue, and to the $100 open balance for 27 days overdue (the pink lines in the figure).

The calculation method is used along with the charging method, described in the next section of this topic, to determine how overdue documents are charged for a particular overdue charge code.

A charging method defines how the system charges an overdue document. An overdue charge can be defined either as a fixed amount or as a percentage (annual rate) on an open balance for the number of days late. If the overdue charge is a percentage, the following formula is used to calculate overdue charges, based on the number of days past due.

Charge amount = (Percent rate) * (Number of days past due) * Open balance / (365 * 100)

A percentage can be configured with a fixed minimum amount or a threshold amount.
If you configure a percentage with a fixed minimum amount, the system charges an overdue document for at least the fixed minimum amount. If you configure a percentage with a threshold amount, the system charges a document only if the calculated charge amount is greater than or equal to the threshold amount.

For details, see the following subsections of this topic:

Some companies charge a fixed amount (a fee) for processing documents of the Overdue charge type.
In these cases, a customer must pay the fee amount in addition to the amount of calculated overdue charges.

A fee is charged for each overdue charge document. An additional line with the fee amount is added to the document.

If your company charges a fee for processing late documents, in the Overdue charges (AR204500) window, for any overdue charge code, specify the following settings:

• Fee amount:
  The fixed amount to be charged for a document of the Overdue charge type.
  A customer pays the amount in addition to the amount of the overdue charges.
• Fee account (Fee subaccount):
  The account (and subaccount, if applicable) to which fee amounts are recorded.

You can leave these fields empty if your company does not charge fees for overdue charge documents.