3

I have an agreement signed that I can charge 1.5% for each month the client has not paid.

Say I sent out an invoice Jan 1 for $1000 and they haven't paid. Payment is due Feb 1.

On Feb 2, I want to send another statement saying that they now owe me $1015. (Is Feb 2 the right day? Could I do it evening on the 1st, or should I give a small grace period in case the check was post-marked the 1st or something?)

How do I account for adding interest in my books? (I am using Xero if that's relevant.)

As easy as it would be to edit the first invoice and resend it, that doesn't sound "right".

Should I instead credit the first invoice to the client's account and create a new invoice for the original amount + interest ($1015)?

What is the appropriate way to handle this situation following standard business accounting procedures?

Improve this question
4
  • Late fee is regulated by Law of every country. In my country it's 1% monthly. I don't think you can add your own late fee.
    – Peter MV
    Dec 22, 2014 at 19:54
  • @ Peter that's incorrect, you can charge whatever you want in late fees. There are certain limits that aren't enforecable in a court of law, but you can protect yourself via the business terms and your payment milestones. As far as a specific percentage I would base it on the costs associated with collecting the funds, what your time is worth, how important the cash flow is to you, and what it will take to motivate them to pay on time. Collecting late fees is ALWAYS going to provide negative net return, the point is just to make sure you get paid on time.
    – Todd Nelson
    Dec 30, 2014 at 0:42
  • @PeterMV, yes, in the US now contract law trumps all other laws according to the supreme court...
    – daaxix
    Jan 1, 2015 at 2:08
  • @ToddNelson I was thinking in case you file a dispute at court. In my country you cannot ask for your own late fees in such cases. It may be different in other countries, thou I am confident that the Law has proscribed max fee you can ask in such cases.
    – Peter MV
    Jan 1, 2015 at 14:21

2 Answers 2

Reset to default
2

I don't know that program, but what I do on my invoices:

Create a new invoice to the customer. As a memo, mention how much was owed previously, and its due date. I then add another line for LATE FEE (2%/month), and enter in however much the late fee is. I give 2 weeks grace after the initial 30 days for my customers, where I just send a copy of the original invoice (so they should have two exact copies). If I still haven't received the payment, then I send over the new invoice.

This has worked well, and allows me to account for the late payment without recreating an invoice and wondering why the books are out.

Improve this answer
3
  • So you're second invoice has just the late fee on it with a note containing the original amount, and then you attach the original to the new invoice?
    – emragins
    Dec 22, 2014 at 21:15
  • @emragins No, I send an exact copy of the original invoice, printed from my program, at the 30 day mark. 14 days after that second notice gets sent out, I send out an invoice with two line items: a memo (no cost in the final column, just a note about what's due), and a late fee charge. This way, the work is not double billed in my invoicing program.
    – Canadian Luke ♦
    Dec 22, 2014 at 22:29
  • I use pretty much the same method, with a new invoice for each month that it is overdue. I also send a statement of account with each invoice, which gives a nice overview of all the invoices to date, and also shows any part payments made.
    – Dre
    Jan 17, 2015 at 14:45
0

Here's what I ended up doing based on the advice of an accountant I trust highly.

1) Make a new Invoice for just the interest amount -- description can be something like "Interest on balance of $1000 @ 1.5%". Apply this to Account "Interest Income"

2) Run a Statement for the client going as far back as necessary. I like running an Activity Statement so they can see what they were charged, what they've paid, and what's due.

3) Send both the Invoice and Statement together.

Improve this answer

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.