Payables Automatic Interest

Payables automatically creates invoices to pay interest for overdue invoices if we enable automatic interest calculation for a supplier; and if we pay an overdue invoice for the supplier in a payment batch or with a quick payment. The new interest invoices are then ready for validation.

The amount of the interest invoice is the interest amount owed. The interest invoice number is the same as the overdue invoice number, but with the suffix - INTx, where 'x' is the count of interest invoices that have been created for the overdue invoice. The payment terms are Immediate if we do not have immediate terms defined, the interest invoice payment terms are the same as the overdue invoice. The interest invoices have the same invoice currency and payment currency as the overdue invoices.

Invoice Due Date Calculation
When we pay an overdue invoice Payables uses the invoice due date to determine how many days overdue the invoice is. Payables determines the due date by using a startdate and payment terms. For eg- If the start date is July 1 2007 and payment terms are Net 30, the invoice will be payable in full on July 30 2007.

During the invoice entry Payables creates schduled payments for the invoice and uses the invoice terms date and payment terms date to calculate the due date. During the invoice validation if the Recalculate Scheduled Payment Payables option is enabled for the supplier site; payables automatically recalculates the scheduled payments. During the recalculation, payables uses the most recent of the available start date option and the most favorable of the available payment terms options to calculate the laeast possible due date.


Interest Amount Calculation
In the Interest Rates window we specify what interest rates is effective during different date ranges we specify. Payables uses the following formula to calculate interest on our invoices. The interest rate Payables uses is the rate effective on the day after the due date of the invoice.

This calculation is in accordance with the U.S prompt payment act, and is not an effective yearly rate. For example the interest rate on a $100 invoice is 7%. After year we would owe is 7.23 as interest.

The following formula can be used to determine monthly compounding interest
P(1+r/12)n * (1+(r/360*d)) -P

P is the amount of principal or invoice amount
r equals the Prompt Payment interest rate
n equals the number of months; and
d equals the number of days for which interest is being calculated.

Accounting for Interest Invoices
Payables creates invoice expense distributions and liability accounting entries for the new invoices using the options and accounts we specify in the Interest tab in the Payables Options window.

i.e setup/options/payables
Interest Tab here we defines Interest Invoice Accounts. (i.e Expense and Liability Account).

When interest invoice entered in the system ,payable creates interest invoice with the

DR- Expenses Account .
CR - Liability Account.

The setting of the Prorate Across Overdue Invoice option controls how payables creates distributions on the interest invoice and what expense account it assigns to the new distributions.
If we enable the Prorate Across Overdue Invoice Option, Payables prorates the interest amount across the item distributions on the overdue invoice. It then builds the account for each interest invoice distribution by using the Natural (Charge)account segment from the interest invoice expense account and
all other account segments from the corresponding item distribution of the overdue invoice.

If the dynamic insertions is disabled and the GL accounts that Payable builds are not valid and active, then payables will instead use the expense interest account for each distribution.

If we do not enable the Prorate Across Overdue Invoice option then Payables creates an interest invoice with one distribution and the expense interest invoice account.

To Setup Payables to Automatically create interest invoices for a supplier site:
In the Interest Region of the Payables Options window enable the Allow Interest Invoices Check Box Enter the Expenses and Liability Account and enter the Minimum Interest Amount (optional). Enable the Prorate Across Overdue Invoice Check Box if you would want to prorate.


Navigation - Setup->Options->Payables and select Interest tab.

In the Payables options window enable the recalculate scheduled payment option if we want. Payables automatically recalculate scheduled payment due dates discount dates and discount amouts during Invoice validation.

Navigation
Payables- Setup->Options->Payables and select Invoice tab.

Ensure that approriate suppliers have the allow interest invoice check box enabled

Setup the interest rates that Payables will use to calculate Interest on overdue invoices

Navigation
Payables - Setup-> Payment-> Interest Rates
enter an interest rate and enter a start date and end date between which the interest rate is effective.

Void Payments and Stop Payments
When we void a payment, or confirm a stop payment, Payables automatically reverses the payment status and accounting records for the invoice that we paid. Payables automatically reverses and voids interest invoices associated with a void payment or stop payment.

Automatic Interest Restrictions
Adjustment Interest Invoices- We cannot adjust an interest invoice if it is paid, and if the payment that paid it has been accounted.

365 Day Limit- Payables does not continue to calculate additional interest after an invoice is 365 days overdue.