Interest Calculation in Tally Prime
Configuring automatic interest on overdue parties — Sunrise Retail's TechWorld and Digital Hub overdue calculations
Module 16 of 31 — Tally Prime. Automatic interest calculation on overdue receivables and payables — configuration, calculation, and recording. Duration: 35 min.
Prerequisites: Module 05 — Ledger Masters
Learning Objectives
- Enable interest calculation in Tally Prime via F11
- Configure simple and compound interest on party ledgers
- Calculate overdue interest for Sunrise Retail's TechWorld payable and Digital Hub receivable
- View interest reports and record interest payment/receipt
Enabling Interest Calculation
Once enabled, each ledger master shows interest configuration fields. You configure interest per party — some parties may have it, others won't.
Interest Types
| Type | Formula | When to Use |
|---|---|---|
| Simple Interest | Principal × Rate × (Days/365) | Standard trade credit terms — most common |
| Compound Interest | P × (1 + R/n)^(nT) | Financial agreements, loan accounts — less common in trade |
For trade payables/receivables, Simple Interest at annual rate is the standard.
Configuring Interest on a Supplier Ledger
Sunrise Retail has a credit agreement with TechWorld Distributors: 45-day credit period, 18% p.a. simple interest on overdue amounts.
Configuring Interest on a Customer Ledger
Digital Hub Retail has a 30-day credit period. Sunrise Retail charges 24% p.a. on overdue amounts.
Sunrise Retail — TechWorld Overdue Calculation
Scenario: April 5 purchase invoice TW-2025-0183: ₹13,45,200 (after trade discount, including IGST). Credit period: 45 days → Due date: May 20, 2025.
Sunrise Retail's cash flow is delayed. Payment is made on May 30, 2025 — 10 days overdue.
Interest calculation:
Viewing in Tally:
Recording Interest Paid to TechWorld
Create ledger "Interest on Late Payment" under Indirect Expenses before this entry. This is the cost Sunrise Retail bears for paying suppliers late.
Sunrise Retail — Digital Hub Overdue Calculation
Scenario: Digital Hub owes ₹5,28,640 (Invoice SR-2025-0042 net of return). Credit period: 30 days → Due date: May 10, 2025. Digital Hub pays on May 25, 2025 — 15 days overdue.
Interest calculation:
Recording interest received:
Interest Report Overview
The report calculates interest automatically using the rates configured in each ledger master. No manual calculation needed.
Posting Interest via Debit Note
The previous sections record interest manually as part of a Receipt or Payment voucher. Tally Prime offers a cleaner alternative: post interest using a Debit Note with a special "Interest Accounting" mode. The advantage — interest sits as a separate document linked to the original invoice, making party-wise ageing reports more meaningful.
When to Use the Debit Note Mode
- You're a supplier and want to formally invoice an overdue customer for interest (printed Debit Note acts as a notice/demand)
- You want interest entries to appear as separate documents in the party ledger — not buried inside a Receipt voucher
- The interest needs its own ageing track (when WAS the interest invoiced, when WAS it collected)
For TechWorld (where you're the buyer paying overdue interest), use a Journal or Payment voucher. The Debit Note Interest mode is most useful for customer-side overdue scenarios — like Digital Hub.
Configuring the Debit Note for Interest
Inside the Debit Note voucher:
Worked Example — 1.85%/30-Day Month Math
Industry practice for trade interest often quotes a "monthly rate of 1.85%" (= ~22.2% per annum simple), with the convention that a month is 30 days. Sunrise Retail's terms with Digital Hub are 30-day credit + 1.85% per 30-day month on overdues. (This sits between the 18% p.a. and 24% p.a. extremes used earlier in this module — it's a common middle-ground rate in Telangana wholesale trade.)
Scenario: Digital Hub has an overdue invoice of ₹50,000 (net of GST), unpaid for 45 days past the due date.
Calculation:
(Note the difference vs the 365-day method used earlier: ₹50,000 × 22.2% × 45/365 ≈ ₹1,369 — close but not identical, because 12 × 30 = 360 ≠ 365.)
Debit Note Voucher Entry
Effect:
- Digital Hub's ledger balance increases by ₹1,388 (they now owe interest on top of the original principal)
- Interest Received credited to P&L as Indirect Income
- A printable Debit Note is produced — can be emailed to Digital Hub as a formal demand
When Digital Hub eventually pays ₹50,000 + ₹1,388, the F6 Receipt voucher clears both the principal and the interest portion of their balance in one entry.
Why "Compound Interest: No" for ageing scenarios: Compound interest charges interest on accumulated interest — appropriate for loan agreements with monthly compounding clauses. For day-count-based trade ageing (the default in Section 50 of CGST Act for GST overdue too), simple interest is correct. Always confirm with the supply agreement — if it's silent, simple is the legal default.
Difference vs the Standard Interest Receipt
| Approach | Voucher | Documentation | When to Use |
|---|---|---|---|
| F6 Receipt with Interest Received credit | Single combined entry | One voucher records both principal and interest collection | Day-of-payment, you're collecting both together |
| Alt+F8 Debit Note (Interest mode) + F6 Receipt later | Two separate vouchers — DN today, Receipt when paid | Debit Note prints as a formal interest demand | You're invoicing interest BEFORE you've collected it; you want a printed demand to send the party |
Practice Exercise
Exercise: CloudStore Online, Bangalore owes ₹1,90,000 (due June 1). They pay on June 16 — 15 days late. Sunrise Retail charges 18% p.a. Calculate the interest and record the receipt.
Show Solution
Calculation:
Tally entry:
Key Terms
| Term | Meaning |
|---|---|
| Interest Calculation | Tally feature to auto-compute overdue interest on party ledger balances |
| Simple Interest | P × R × T — interest on principal only; standard for trade credit |
| Compound Interest | Interest on principal + accumulated interest — for financial agreements |
| Overdue Days | Days beyond the agreed credit period |
| Interest Received | Income account — Indirect Income — charged to overdue customers |
| Interest on Late Payment | Expense account — Indirect Expenses — paid to suppliers for late payment |
| Due Date | Invoice date + credit period days — Tally calculates overdue from this |
Module Summary
- Enable interest:
F11 → Accounting Features → Activate Interest Calculation: Yes - Configure per ledger: set rate, period (per year), and method (simple/compound)
- TechWorld payable: ₹13,45,200 overdue 10 days @ 18% p.a. = ₹6,634 interest expense
- Digital Hub receivable: ₹5,28,640 overdue 15 days @ 24% p.a. = ₹5,213 interest income
- View report:
Reports → Statements of Accounts → Interest Calculations → Ledger - Record interest paid as Indirect Expense; interest received as Indirect Income
Checklist before moving on:
- F11 → Activate Interest Calculation: Yes
- TechWorld ledger: 18% p.a. simple interest configured
- Digital Hub ledger: 24% p.a. simple interest configured
- Interest on Late Payment ledger created under Indirect Expenses
- Interest Received ledger created under Indirect Income
- Interest report checked for TechWorld — ₹6,634 showing
Quick Quiz
1. Simple interest for ₹1,00,000 overdue 30 days at 18% p.a. is:
- a) ₹1,800 (30-day month basis)
- b) ₹1,479 (365-day basis)
- c) ₹3,000
- d) ₹18,000
Answer
b) ₹1,479 — ₹1,00,000 × 18% × 30/365 = ₹1,479.45. Always use 365-day basis unless the agreement specifies 360 days.
2. Interest received from overdue customers is classified under:
- a) Direct Income
- b) Indirect Income
- c) Direct Expenses
- d) Sundry Debtors
Answer
b) Indirect Income — interest received is non-trading income. It goes in the P&L under Indirect Income, below gross profit.
3. Tally calculates interest automatically when:
- a) You press F11 only
- b) Interest is activated in F11 AND configured in the individual ledger master
- c) You run the BRS report
- d) A payment voucher is entered
Answer
b) Both steps are needed: (1) F11 → Activate Interest Calculation: Yes at company level, AND (2) configure rate and method in each party's ledger master. F11 alone enables the feature; ledger configuration tells Tally what rate to apply to each party.