CA FOUNDATION - ACCOUNTANCY

ACCOUNTS
CURRENT

PART - A: THEORY SECTION

Account Current

When there are several transactions between the two parties and the interest
agreement exists, there is always a chance of dispute on account of interest
calculations. In this case, an account current becomes an useful tool to avoid such
disputes. This is a working of interest and settlement amount done by one of the
parties which is sent to another party who can cross verify it.

 Points to remember
1) Account current defined
Account current is a running statement of transaction between parties for
given period of time showing interest calculation in ledger form.

2) Account current is prepared in following cases –

a) When there are frequent transactions between two parties and interest is
charged on outstanding.
b) In consignment transaction when consignee prepares account current if
he settles the account with interest.
c) Transaction between banker and customer
d) In joint venture when no separate books of accounts maintained and each
covertures is entitled to interest on his investments

3) There are three ways of preparing account current –

a) Interest Method
b) Product Method
c) Product of balance Method

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Method 1: Interest Method

1. It is prepared in a form of ledger of account having following 3 additional

columns:
(a) Due date (b) Number of days (c) Interest

2. Record the transactions in the account current as if a normal ledger a/c is being
prepared along with their due dates. If the due date is not given separately
then the date of transaction itself will be considered as due date.

3. Count the number of days from each due date upto the date of settlement. In
this calculation, the day of due date should be excluded (however in case of
opening balances it should be included).

4. Calculate interest for each transaction on the basis of no of days so calculated

and determine the amount of the net interest to be charged or provided by
balancing the interest column.

5. Record the entry for charging / providing the interest (Rounded off)

6. Balance the amount column and the balancing figure represents settlement
amount along with interest

RED INK INTEREST

Normally in account current, interest is calculated on amount from due date of a
transaction to closing date of account. But when in an account current, the due
date of a particular transaction falls after the date of settlement (closing date of
account current) then interest from closing date of account current to due date of a
transaction is calculated and written on opposite side of transaction (on last date).
Such interest is red ink interest. Such interest is negative interest as it is written on
opposite side of a transaction and it was written in red ink in earlier periods.

Method 2: Product Method

Under this method, the interest column of method 1 is replaced by product column
(Product = Amount x Number of days). On the settlement date, the product column

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should be balanced and the interest on balance of product should be calculated

for 1 day. Then record the entry for charging / providing the interest on the opposite
side of the balance of product and determine the settlement amount by balancing
the amount column.

Method of computing no. of days

Backward Method
Forward Method
No. of days calculated from
(Epoque Method)
No. of days are calculated from
due date of transaction to
the opening date of statement
date of closing the account
to due date of transaction

Method 3: Product of balance method (also known as periodic balance method):

This method is used for calculation of settlement amount together with interest in
respect of those transactions where the debit balance and credit balance carries
different rates of interest.

Procedure:
1. Prepare an Account Current in the form of a ledger where the closing balance
can be determined after each transaction (with debit or credit specification).

2. Count the number of days from the date of transaction to the date of next
transaction. In case of last transaction, number of days is counted to close of
the period.

3. Determine debit or credit product (Debit or Credit balance x Number of days).

4. Net interest to be charged or provided is to be determined by comparing interest

on sum of debit product for one day with sum of credit product for one day.

5. Record the entry for providing / charging the interest and determine the
settlement amount.

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PART B - CLASSWORK SECTION

Q.1 Mehta owed ` 3,000 on 1st January, 2010 to Mr. Somesh. The following are the
transactions that took place between them during 2020. It is agreed between the
parties that interest @ 6% p.a. is to be calculated on all transactions.

2010 ` 2010 `
Jan.16 Mr. Somesh sold 2,000 Feb.10 Mr. Somesh pay cash 1,500
goods to
Mr. Mehta
Jan.29 Mr. Somesh 1,500 Mar.13 Mr. Mehta accepts 2,000
Purchased a bill drawn by Mr.
goods from Mr. Somesh
Mehta for one month

They desire to settle their accounts by one single payment on 31st March, 2010.
Ascertain the amount to be paid to the nearest rupee. Ignore days of grace.
Prepare account current by 1) Interest Method 2) Product Method

Q.2 P. Banerjee had the following transactions with P. Sen.

2010 `
Jan. 20 Sold goods to P. Sen 2,800
Mar. 2 Bought goods from P. Sen 1,500
3 Accepted P. Sen’s draft at 1 month due 1,200
April 11 Cash paid to P. Sen 1,000
30 Goods sold to P. Sen due end of May 800
May 11 Bought goods from P. Sen 2,000
June 12 P. Banerjee drew a bill on P. Sen, payable two 2,100
months after date and this was duly accepted
by P. Sen

Make out an Account Current to be rendered by P. Banerjee to P. Sen as at 30th
June, bringing interest into account @ 10% p.a. (use interest method).

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Q. 3. The following are the transactions that took place between A and B during the half
year ended 30th June 2010:

(a) Balance due to A by B on 1st January 3,000

(b) Goods sold by A to B on January 7 4,400
(c) Goods purchased by A from B on February 16 6,400
(d) Goods returned by A to B on February 18
(out of purchases of February 16) 500
(e) Goods sold by B to A on March 24 3,500
(f) Bill accepted by A at 3 months on April 22 1,500
(g) Cash paid by A to B on April 29 2,500
(h) Goods sold by A to B on May 17 2,700
(i) Goods sold by B to A on June 22 3,000

Draw up an account current to be rendered by B to A charging interest at 20% p.a.

by Product Method.

Q.4 Following transaction took place between A & B for 3 months ending 31.3.2017.

Books of A

Date Particulars Amount

01.01.2017 Opening balance (Dr.) 1,00,000
10.01.2017 Sold goods to B 2,00,000
15.01.2017 Cash received from B 2,00,000
15.02.2017 Sold goods to B 2,00,000
01.03.2017 Cash received from B 1,00,000

You are required to calculate amount of interest to be paid by one party to another
@10% p.a. using epoque method.

Q.5 On 2nd January, 2010 Vinod opened a current account with the Allahabad Bank
Limited; and deposited a sum of ` 30,000. He further deposited the following
amounts:

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15th January ` 12,000

12th March ` 8,000
10th May ` 16,000
His withdrawals were as follows :
15th February ` 26,000
10th April ` 30,000
15th June ` 14,000

Show Vinod’s A/c in the Ledger of Allahabad Bank. Interest is to be calculated at 5%

on the debit balance and 2% on credit balance. The account is to be prepared as on
30th June 2010.
Calculations may be made correct to the nearest rupee.

Q.6 Roshan has a current account with partnership firm. He has a debit balance of
` 75,000 as on 01.07.2012. He has further deposited following amounts:

Date Amount (`)

14.07.2012 1,38,000
18.08.2012 22,000
He further withdrew following amount:
29.07.2012 97,000
09.09.2012 11,000

Show Roshan account in the books of firm. Interest is calculated @ 10% p.a. on debit
balance & 8% p.a. on credit balance. Prepare account current as on 30.09.2012.

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PART C - HOMEWORK SECTION

Q.1 Following transaction took place between X and Y during the month of April,
2020.

April `
1 Amount payable by X to Y 10,000
7 Received acceptance of X to Y for 2 months 5,000
10 Bills receivable (accepted by Y) on 7.2.2020 is honoured 10,000
on this due date
10 X sold goods to Y (invoice dated 10.5.2020) 15,000
12 X received cheque from Y dated 15.5.2020 7,500
15 Y sold goods to X (invoice dated 15.5.2020) 6,000
20 X returned goods sold by Y on 15.4.2020 1,000
20 Bill accepted by Y is dishonoured on this due date 5,000

You are required to make out an account current by products method to be

rendered by X to Y as on 30.04.2020, taking interest into account @ 10% p.a.
(assume 1 year = 365 days)

Q.2 From the following particulars, make up an Account Current to be rendered by Mr.
X to Mr. Y on 31st December, 2020 taking interest into account at the rate of 18%
p.a.

01.07.2020 Balance owing by Mr. Y ` 600

30.07.2020 Goods sold to Mr. Y (Credit Period allowed 1 month) ` 300
01.08.2020 Good purchased from Mr. Y (Credit Period received ` 200
1 month)
01.09.2020 Cash received from Mr. Y ` 100
01.09.2020 Mr. Y accepted Mr. X’s Draft at 3 Months date ` 400

You are required to prepare the Account Current according to interest
on individual transaction under the Forward and Backward methods.

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PART D – PAST EXAM

Q.1 From the following prepare an account current, as sent by Avinash to Bhuvanesh on
31st March, 2018 by means of products method charging interest @ 5% per annum:

Date Particulars Amount (`)

2018 January 1 Balance due from Bhuvanesh 1,800
January 10 Sold goods to Bhuvanesh 1,500
January 15 Bhuvanesh returned goods 650
February 12 Bhuvanesh paid by cheque 1,000
February 20 Bhuvanesh accepted a bill drawn by 1,500
Avinash for one month
March 11 Sold goods to Bhuvanesh 720
March 14 Received cash from Bhuvanesh 800

Q.2 Ramesh has a Current Account with Partnership firm. He had a debit balance of
` 85,000 as on 01-07-2018. He has further deposited the following amounts:

Date Amount (`)

14-07-2018 1,23,000
18-08-2018 21,000

He withdrew the following amounts:

Date Amount (`)

29-07-2018 92,000
09-09-2018 11,500

Show Ramesh’s A/c in the books of the firm. Interest is to be calculated at 10%
on debit balance and 8% on credit balance. You are required to prepare current
account as on 30th September, 2018 by means of product of balances method.

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Q.3 Attempt any one of the following two sub-parts i.e. Either (i) or (ii).
(i) From the following particulars prepare an account current, as sent by Mr.
AB to Mr. XY as on 31st October, 2018 by means of product method charging
interest @ 5% p.a.

Date Particulars (`)

1st July Balance due from XY 1,500
20th August Sold goods to XY 2,500
28th August Goods returned by XY 400
25th September XY paid by cheque 1,600
20th October Received cash form XY 1,000

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PART E – OBJECTIVE

Q.1 State with reasons whether the following statement is True or False:

1. In account current red ink interest is treated as negative interest.

Ans. True – Red ink interest is interest calculated on a transaction whose due date
falls beyond closing date of accounts. So extra interest is to be calculated from
closing date to due date which is written on opposite side of transaction in
account current.

2. The interest charged by banker to customer on overdrawn account is called red

ink interest.
Ans. False – Red ink interest is interest calculated on a transaction whose due date
falls beyond closing date of accounts. So extra interest is to be calculated from
closing date to due date which is written on opposite side of transaction in
account current.

3. There are 2 ways of preparing account current.

Ans. False – There are 3 ways of preparing account current i.e. Interest Method,
Product Method and Product of Balance method.

4. In case the due date of a bill falls after the date of closing the account, the
interest from the date of closing to such due date is known as Red-Ink interest.
Ans. True – In case the due date of a bill falls after the date of closing the account,
then no interest is allowed for that. However, interest from the date of closing
to such due date is written in “Red-Ink” in the appropriate side of the ‘Account
current’. This interest is called Red-Ink interest.

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