|
Payment Application Order |
  
|
|
Payment Application Order |
|
A separate running balance is kept for Principal, Non-principal and Interest. As debits and credits are applied the program needs to know the order in which the amount should be allocated.
For example, if a payment of $500.00 is made when the current balances are:
Principal $1000.00DR
Non-principal $200.00DR
Interest $250.00DR
... then where should the $500.00 go?
The Dr/Cr Application order controls this.
A. If the order was 1. Principal 2. Non-principal, 3. Interest - the resulting balances would be:
Principal $500.00DR ($1000.00DR - $500.00)
Non-principal $200.00DR
Interest $250.00DR
Further interest would accrue on the amount of Principal, ie $500.00.
B. However, it the order was 1. Interest 2. Non-principal, 3. Principal - the resulting balances would be:
Principal $900.00DR ($1000.00DR - $100.00)
Non-principal $0.00 (200.00DR - $200.00)
Interest $0.00 ($250.00DR - $200.00)
Further interest would accrue on the amount of Principal, ie $900.00.