In Payables setup there is an option to select create interest invoice checkbox. Could you please explain, if I want system to automatically create e.g.8% interest invoice on any AP invoices past due, where can I define the same. Thanks.

I have not covered interest invoices in my AP videos yet. But here some guidance:

AP module automatically creates "interest invoices" to pay interest for overdue invoices.
You need to enable automatic interest calculation for at supplier level.
Interest invoices are created when you pay an overdue invoice in a payment batch or with a Quick payment.
The amount of the interest invoice represent "interest owed".
The interest invoice number is the same number as the overdue invoice number and the prefixed with text: INV.
The payment terms are Immediate.
If Immediate term does not exist, then the interest invoice payment terms are the same as the overdue invoice.
The interest invoices take the same invoice currency and payment currency as the overdue invoices.
AP module will not not create interest invoices when Manual payment method is used to pay overdue invoices.
Hope that helps.

Thanks. I did enable create interest invoice at supplier level. But i'm not sure as to where to provide for interest rate. Under setup->paymnets->interest rates, i provided the interest rates but for any past due invoice for that supplier no interest invoice got created. I used Quick payment method for invoice payment. Invoice dt 21-MAR-2012 with immediate payment terms and paid on 21-APR-2012. Thanks

You entere interest rates in the "Payment Interest Rates" window.
The navigation is Setup->Payment->Interest Rates.