how does QuickBooks calculate interest from customers in our previous video we determined
that Betty's finance charge would be fifty nine dollars and 84 cents On January 31 well how do
we know that's right how do we know exactly what QuickBooks is doing to calculate the interest and
find that number well in order to know that you have to know five phrases and they're common sense
and very simple let's call the invoice balance meaning the amount the customer owes on that
specific invoice let's call that the amount owed on assessment date because January 31 was the day
that we stopped and assessed the interest the annual rate is the percentage that we put in to
the Preferences window when we were setting up the finance charge that's the rate of interest that we
charge the annual interest is actually the money amount that the customer would pay an interest if
the balance of the invoice stayed the same for one whole year and of course the balance of any
invoice is not going to stay the same for one whole year so what you would then have to do is
multiply it by the fraction of the year that the money was owed so let's call the fraction of the
year the part of the year that the money was owed on that invoice and let's call our final answer
the current interest you could also call it the amount that QuickBooks charges the customer and
records on a separate invoice so I set up an Excel spreadsheet with these five items to help explain
how QuickBooks calculates the interest charge and each of these words should be common sense when we
take a look at the open invoice report we see that QuickBooks made an invoice in the amount of fifty
nine dollars and eighty four cents because that was the interest that was charged just for these
two invoices right now the open invoice report says all meaning it's showing the results of all
open invoices regardless of date however if we change the date in the report to the assessment
date to the date that we calculated the interest by the way after you change the date you have
to go all the way to the right and click refresh and now that we refreshed it as of the assessment
date you can see that On January 31 Betty owed three thousand for invoice number six and Betty
owed four thousand for invoice number four but more importantly on the day that we assessed the
interest the invoice number six was 25 days old and on the day we assessed the interest invoice
number fourteen was only four days old so we're only charging Betty for twenty five days worth
of interest for invoice number six and we're only charging Betty for four days worth of
indra interest for invoice number fourteen let's take a look at how this would look on an Excel
spreadsheet and see if we can calculate the same result fifty nine dollars and 84 cents so here we
have an Excel spreadsheet with each of the five terms that you need to know in order to make
sure that you're calculating QuickBooks interest correctly the first invoice that was due on the
assessment date was three thousand dollars that was invoice number 6 and the second invoice that
was due on the assessment date was invoice number 14 for four thousand dollars or I believe it was
invoice number fourteen yes it was okay now the annual interest is the balance on the assessment
date times the annual rate so if the balance on in number six stayed the same for the whole year
this cell would be equal to the balance of the invoice times the annual rate so if the balance
of invoice number stick six stayed the same for a whole year Betty would owe us seven hundred
and twenty dollars of interest just for invoice number six what about invoice number fourteen well
that annual interest is equal to the balance of invoice number fourteen times the annual rate so
if the balance of invoice number fourteen did not change for one year then the annual interest or
the interest Betty would oh just for that invoice would be nine hundred sixty dollars however they
did not owe this money for an entire year each of these invoices were only old for a fraction
of the year when I go back to the open invoice report I can see that invoice number six was
only owed for twenty five out of three hundred and sixty-five days so this cell is equal to
twenty five divided by 365 when I hit enter I get a very big decimal I know that some of the people
watching this video are going to suggest that I change the number format into fraction however
the reason that I will leave it as regular number is because excuse me I will leave it the way it
was because excels fractions are limited to the number of digits they can put in the numerator
and denominator we have three digits as you can see up here we have three digits and therefore
Excel won't show it in the cell the way it shows it up here in the formula bar what's the fraction
of the year for the next invoice well when I look at the open invoice report I see that the
four thousand dollar invoice 14 was only owed for four days as of the assessment date so that
means that this fraction of the year is equal to four divided by 365 and of course we get the big
decimal now the current interest or the interest that is owed just for this period is equal to the
amount that they would Oh for the year times just the fraction of the year that they owe it
so Betty owes us 49 dollars and 32 cents just for the three thousand dollar invoice and of course
it's the same for the next invoice the interest that they owe for the current period is equal to
the amount that they would over the year times the fraction of the year that they owe it and
therefore the amount of interest that videos just on it on the four thousand dollar invoice is ten
dollars and 52 cents when I take the sum of both you can see that Excel tells me that the total
money that Betty owes for just January 1 for these two invoice balances for this fraction of the year
is equal to fifty nine dollars and eighty four cents and when I go back to my open invoice you
can see that the invoice QuickBooks generated on January 31 was fifty nine dollars and 84 cents