Interest Calculation Process

The interest calculation process is as follows:

First the program identifies the items on which interest is to be calculated according to the
rules defined in the interest indicator, and any additional specifications you make when
executing the program. The rules you enter determine the items and transaction for which
interest can be calculated, such as:

Cleared or open items only

All clearing transactions or only those with a payment (thereby excluding uncleared credit
memos and payments on account).

Credit and debit items or only debit items. If interest is to be calculated on credit items
(for example, credit memos and payments on account), it is calculated in the same way as
for debit items.

The program then determines the days for which interest is to be calculated, taking into
account the calendar type.

There are basically two factors involved in interest calculation: the lower and upper limit
of the calculation period you specify for the interest calculation run, and the time period
between the net due date and the date of the payment document (or the clearing date for
credit memos determined per item). The program selects those items in which the period
between the net due date and clearing date falls within the lower and upper limit of the
calculation period. If the lower limit of the calculation period is suppressed, the system
uses the value from the Last key date field in the master record as the lower limit.

You can specify whether interest should be calculated as of the date of the last interest
calculation. That is, only those items still open as of the date of the last run will be
included in the new run. Cleared items are only included if the clearing date is later than
the date of the last interest calculation.

Tolerance days may be specified in the interest indicator. These are added to the due date
for net payment, but are only relevant for selecting the items to be included in the interest
calculation run. Interest is always calculated as of the due date for net payment without
taking into account any tolerance days. You can also define transfer days for cleared items.
This is a way of making allowance for when payments take longer than usual to transfer or
when the relevant accounts are not cleared promptly. Transfer days are subtracted from
the date of the payment document or from the clearing date.

After determining the items on which interest is to be calculated, the program works out
the amount in local currency. In doing so, it takes into account any interest rate changes
within the calculation period, and if a minimum amount is specified for the interest
indicator, it compares the calculated interest amount with the minimum amount. By
specifying a minimum amount, you can prevent letters from being created and sent to
vendors for insignificant interest amounts.

Lastly, correspondence is created if the calculated interest exceeds the minimum amount.
The form containing information for the correspondence is defined in the interest indicator.
However, you can specify a different form in each interest calculation run.

Information in the Letter
The letters you send to your business partners about interest calculation contain the following
information:

Text

Overview of line items

Interest rate overview

Interest overview

The system also creates an error list if the calculation report did not run correctly.
You can also request the following lists:

Log

Account overview

Executing the Interest Calculation Program
To calculate interest on arrears, proceed as follows from the Accounts Receivable or Accounts
Payable menu:
1. Choose Periodic processing -> Interest calculation -> Arrears and then the desired option:
-> Without open items
-> With open items
-> Without postings
-> Free selections
The system displays the screen for entering your selection criteria.
You specify the following:

Selection criteria

You can specify an interval for accounts and company codes. In addition, you can restrict
the interest calculation to only those accounts with certain interest indicators, or to
reconciliation accounts or to special G/L transactions.

Calculation period

If you choose the Free selections option, you can enter a lower and upper limit for the
calculation period directly. If you choose one of the other three options, you can specify
only the upper limit, and the system uses the value of the Last key date field in the master
record as the lower limit. The program checks the items for this period. Alternatively,
select the Include date of last int calc. parameter in which case the program uses the
upper limit entered in the last interest calculation run as the lower limit of the calculation
period. This ensures that calculation periods do not overlap. If you select the Calc. int.
from net due date parameter, the program calculates interest as of the due date for net
payment, ignoring any lower limit.

Calculation of interest

The rules for calculating interest are stored under the interest indicator. If you are using
the Gregorian calendar, you can specify that, when one occurs, a leap year is taken into
account when calculating interest. You determine which calendar type is used by specifying
this under the interest indicator.

Form and printing the letters

You can specify your own form to define which information is contained in the form or the
letter. If you do not do this, the form stored in the system is used. You must also specify
the date of issue for the letter.
1. Specify the appropriate data. You reach the second screen page with the scrolling (page
down) key.
It is possible to have the system automatically post debit or credit interest by batch input.
To do this, select the Post interest settlements parameter. The date of the last interest
calculation run is updated by batch input in the master record. If you require this, you must
select the Maintain master records parameter.

2. Choose Program -> Execute to calculate the interest.

1. Note:
a. The customer or vender master record of an account must contain an interest
indicator so that it is taken into consideration during interest calculation.

b. Number ranges defined for interest calculation are not used for any other purposes
(for example, for document types). If interest is calculated on accounts from
various company codes, then you define the same number range for each company
code.

c. Premium defined at time based term ( T Code OB81) is in addition to rate of
interest define at reference interest rate.

d. If no reference interest rate is attached on T Code OB81, then the rate mentioned
at premium will be taken as interest rate

e. Transaction code OBAC and OB83 are optional.