How do I calculate interest using the average daily balance method?

I assume you're referring to a credit card or other revolving credit. That's difficult to explain. I can show you a short example.

Billing Date 1/16 Balance $200
1/17 charge $20
1/24 charge $50
2/2 charge $30
2/8 payment $50

You start with the beginning balance and figure how many days did you have that balance, and multiply the balance out by that many days. Then you take a transaction, re-figure the balance, and then multiply by the number of days you had that balance, etc. You have to remember at the end to take the last balance out to the next billing date, which we'll assume to be the same date of the month.

$200 x 1 day = $200
+ $20 charge
$220 x 7 days = $1540
+ $50 charge
$270 x 9 days = $2430
+ $30 charge
$300 x 6 days = $1800
- $50 payment
$250 x 8 days = $2000

Add up the days which should equal the number in January, 31. And add up the total dollar amounts = $8001.

This really isn't any different than averaging anything else. If you wanted to average all 31 days, you would write down the balance for each day, add them all up and divide by the 31 days. That's how we do an average. The only difference is that because we have the same balance for several days, we're short-cutting and just multiplying out by that number of days so we get them all in there. (Officially called a weighted average.) I do have 31 days above. And the $8001 is the total I'd get if I added them all individually.

So to get an average I divide 8001/31 days = $258.10 average per day.