Description of finance charges in Small Business Accounting 2006, in Accounting Express, and in Accounting Professional

This article describes how to set up a finance charge in Microsoft Office Small Business Accounting 2006, in Microsoft Office Accounting Professional, and in Microsoft Office Accounting Express. This article also describes the formula that is used to calculate the finance charge and how the finance charge is applied. This article describes scenarios where the minimum finance charge is applied.

Set up a finance charge

To set up a finance charge, follow these steps:

1. On the Company menu, click Preferences.
2. In the Company Preferences dialog box, click the Customers tab.
3. Enter the appropriate information in the following boxes:
   • Default annual interest rate
   • Default minimum finance charge
   • Grace days
   Then, click Invoice date or Due date.
   
   Note This information is required. This information determines the amount that appears in the Finance Charge box.

For more information about how to set up the finance charge, see the Help for Small Business Accounting 2006, for Accounting Express, and for Accounting Professional.

The formula

Small Business Accounting 2006, Accounting Express, and Accounting Professional use the following formula to calculate the finance charge: When you use a finance charge, you must consider the following:

• Although the rate is entered as a percentage in Small Business Accounting 2006, in Accounting Express, and in Accounting Professional, the equation requires the rate to be in decimal format.
• If the number of days that payment is overdue is less than the number of grace days that are permitted, the finance charge is zero.
• If you try to calculate the finance charge based on 365 days per year, the finance charge amount is incorrectly calculated. You must calculate the finance charge based on 12 months that contain 30 days.

Overdue invoices and the minimum finance charge

The minimum finance charge is applied to an overdue invoice that generates a finance charge that is less than or equal to the minimum finance charge that you configured in the Company Preferences dialog box.

For example, consider the following scenario:

• Company A has a $5 minimum finance charge and an interest rate of 5 percent.
• Customer 1 is seven days late paying a $1,000 invoice.

The finance charge is $0.97. Therefore, the $5 minimum finance charge is applied to cover administrative costs that are related to the finance charge invoice.

Multiple overdue invoices and the minimum finance charge

When you use a finance charge and you have a customer who has multiple overdue invoices, you must consider the following:

• If a customer or an account has multiple overdue invoices, Small Business Accounting 2006, Accounting Express, and Accounting Professional add the finance charges from the overdue invoices. The sum of these finance charges is displayed in the Total Finance Charge box in the Finance Charge window. If the total finance charge that is calculated for all that account's invoices is less than the minimum finance charge, the $5 minimum finance charge is applied.
  
  For example, consider the following scenario:
  • Company A has a $5 minimum finance charge and an interest rate of 5 percent.
  • Customer 1 is seven days late paying a $1,000 invoice. The finance charge is $0.97.
  • Customer 1 is eight days late paying a $500 invoice. The finance charge is $0.55.
  • Customer 1 is 14 days late paying a $200 invoice. The finance charge is $0.38.
  The total finance charge is $1.90. Because the total amount is still less than the minimum finance charge, the $5 minimum finance charge is applied.
• When a customer has multiple overdue invoices, and the total finance charge is less than the minimum finance charge, the minimum finance charge is applied only one time. The minimum finance charge is not applied for each overdue invoice. This functionality is by design.
• The minimum finance charge is not charged in the following scenario:
  
  In the sample scenario, it is 14 days later. Customer 1 has not paid yet. The total finance charge is $5.22:
  • The finance charge for the $1,000 invoice is $2.92.
  • The finance charge for the $500 invoice is $1.52.
  • The finance charge for the $200 invoice is $0.78.
  Because the minimum finance charge is $5, the total finance charge of $5.22 is applied.
• Finance charges can be calculated as frequently as you want.