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The way you should handle late fees is not based on accounting standards or IRS regulations - but based on your contract.If you are using a standard contract form - there must be a clause.As a general accounting and lending practice - interest is compounded (added to the balance) monthly - for instance - you added all fees and interest on the last day of each month - and interest for the next month is calculated based on that amount.Credit card companies have interest compounded DAILY - but banks and mortgage companies - monthly.
In some situations - the interest is compounded annually - added on the last day of the year.
But never compounded for longer period.
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