interest on overdue accounts receivable question
We charge 2% monthly interest on our overdue accounts receivable. We have it set up to charge the interest on the principle sum of the original invoice (before HST) The interest is calculated on a monthly basis and totalled for each monthly invoice. HST is then charged on the total - is this correct? Should we be adding up interest only for each month and then adding that to the total including HST from the original invoice?
I'm in the U.S., and am not all that familiar with Canadian taxes ( HST = Harmonized Sales Tax in Canada). That said, I'm going to try to answer your question based on what we do here in the U.S.
We do not calculate sales tax on interest charged, only on the purchase price of the item or service.
Also, when you calculate a customer's balance, you should use the total amount due. For example, if the item purchased costs $10, and the sales tax is $0.70, the total due is $10.70. If the customer doesn't pay in time, interest is calculated on the $10.70.
The interest is a sort of penalty for not paying on time. So it's calculated on the total due.
I hope that helps!
If you need anything else, just drop me a line.