When can you start charging interest on unpaid invoices?
In order to maintain good relations with contractors, most entrepreneurs make efforts to pay their debts in a timely manner and not to create debts. However, there are situations when contractors delay paying invoices for various reasons. In such a situation, the creditor entrepreneur may start charging interest on unpaid invoices. Check on what terms.
When to start charging interest on unpaid invoices?
In business transactions, it is very common to meet invoices with deferred payment terms - thanks to transfers, entrepreneurs can pay their debts even without meeting the contractor again. Therefore, the invoice payment term is often extended by 7, 14 or even 30 days compared to the invoice issuance date.
The extended payment deadline is a standard procedure, but it can become a problem when the debtor exceeds the set date and does not pay the debt. In order to motivate taxpayers to pay their payments on time and to reduce payment gridlocks, a mechanism has been created for charging interest on unpaid invoices.
An entrepreneur who has not received the money on time may start charging interest starting from the day after the payment date. Then, they are charged until the debtor pays the amount due (in the case of payment by bank transfer, the date of receipt on the account is considered to be such a day).
However, it is worth remembering that the accrued interest may also be statute-barred within 3 years.
How to document the accrual of interest?
The basic document on which the accrued interest is shown is the interest note. However, it is worth knowing that issuing it is not the responsibility of the entrepreneur, but is only an option.
In accounting practice, you can often encounter overdue payments on subsequent invoices issued for the contractor.
Remember that the interest accrued is your income!
Accrued penalty interest is not only a penalty for an untimely contractor, but also income for the creditor - of course only upon receipt. This means that when the debtor pays the debt, the entrepreneur should classify the interest accrued as other operating income and tax it accordingly.