Interest in the Nortridge Loan System accrues on a daily basis based on one of three methods: simple interest, fixed amortization, or rule of 78s.

Simple Interest: the interest is computed on the current principal balance, which is multiplied by the interest rate to determine annual interest, then divided by a factor to derive the daily interest. This factor is determined by the interest year setting of the loan.

Fixed Amortization: the interest is computed on the expected principal balance from the amortization schedule, which is multiplied by the interest rate to determine annual interest, then divided by a factor to derive the daily interest. As above, the interest year setting determines this calculation.

Rule of 78s: the expected interest over the life of the loan is pre-computed. This pre-computed interest is divided by the summation of the total number of payments. This payment factor is then multiplied by a declining number, beginning with the total number of payments, and decreasing by one, until for the final payment the number is one. The resulting figure is the interest for the period in question and is divided by the number of days in the current period to derive the daily interest. For more information on this procedure, see Add On Interest.

The method by which this daily interest posts to the General Ledger is determined by the use of accrual basis or cash basis accounting. The default setup of the Nortridge Loan System is for accrual basis.

Any daily interest accrual will create a set of general ledger entries. A debit will be posted to the GL placeholder: Accrued Interest1, and a credit will be posted to the GL placeholder Interest Income1. If the loan system is to be configured for Accrual Basis Accounting, each loan group should have the appropriate interest receivable account mapped to Accrued Interest1 and the appropriate revenue account mapped to Interest Income1.

In Cash Basis Accounting, revenue for interest is not realized until the point of interest payment. The Nortridge Loan System is configured, by default for Accrual basis accounting. In order to run your interest via cash basis, it is necessary to make the following modifications to the setup:

1. Make sure that the place-holders Accrued Interest1 and Interest Income1 are mapped to NONE. These place-holders will automatically receive a debit and credit (respectively) of the amount of the daily accrual, and in Cash Basis you do not want a daily posting. Therefore, your actual interest revenue account CANNOT run through the Interest Income1 place-holder.
2. Use the “Labels” setup under Loan Setup to set one of the user-defined loan group place-holders for your actual cash-basis interest income. Use a label such as “CB INTEREST INCOME.” It is not necessary to create a place-holder for the receivable asset as there is no interest receivable in cash-basis accounting.
3. Map the placeholder you have created (e.g. CB INTEREST INCOME) to your actual interest revenue account in the Loan Group.
4. Modify the following interest payment transaction codes (202, 206, 210, and 222) as follows: the credit is set to PHAccrued Interest1; change this credit to the placeholder that you have created for your cash basis interest income (e.g. CB INTEREST INCOME).