Average Daily Balance Method

Reviewed by Apoorva | Updated on Sep 28, 2020


The average daily balance method is a common accounting method that calculates interest charges by considering the balance invested or owed at the end of each day over the billing period. It does not take an average balance throughout the billing cycle.

What are the Other Methods Available?

There are two other common methods used to calculate the interest applicable apart from the average daily balance method, i.e. previous balance method and adjusted balance method.

The previous balance method charges interest based on the amount owed at the beginning of the previous month. The calculation will be carried out at the end of a billing cycle. When it comes to the adjusted balance method, the finance charges are calculated based on the amount owed at the end of the current billing cycle, after the credit and payments are posted.

How it Works?

The average daily balance method considers the total each day's balance over the billing cycle divided by the total number of days in the cycle.

The outcome is multiplied by the interest rate to figure out the customer's finance charges. Finance charges are calculated by dividing the cardholder's APR by 12.

Related Terms

  • Employee Provident Fund

    The Employee Provident Fund (EPF) is a retirement benefits scheme in which employees of an organisation contribute a small portion of their basic pay monthly.   Read more

  • Cost of Funds

    The cost of funds is the interest rate that financial institutions are paying on the funds they use in their business.   Read more

  • Dormant Account

    If you have a savings or current account and if you have not made any transactions for more than 12 months through it, the account will be listed as an inactive account.   Read more

  • Consumption Smoothing

    Consumption smoothing refers to a process of achieving a balance between spending for today's needs and saving for the future.   Read more

  • Showrooming

    Showrooming refers to the practice of checking out a product in a retail store before buying it from online retailers.   Read more

  • Savings

    Savings represents an individual’s unspent earnings.   Read more

Recent Terms

  • Target Risk

    Target risk assets are a class of assets that are not covered under the coverage of a reinsurance treaty or insurance policy because of a particular risk they possess.   Read more