Fixed Deposit Journal Entry
A fixed deposit is a financial instrument a customer deposit cash into the bank to earn more interest. The fixed deposit usually provides a higher rate of interest than regular savings accounts until the maturity date. The customer deposits a sum of money for a specific time period and earns interest at a predetermined rate. At the end of the tenure, the customer gets back the principal along with the interest earned.
Fixed deposits are one of the most popular investment options and offer various benefits such as the safety of capital, higher interest rates, and flexibility in terms and amount. However, they also have certain drawbacks such as penalties for early withdrawal and low liquidity. Overall, fixed deposits are a safe and secure investment option for those looking to grow their wealth over time.
Fixed deposits are often used by businesses as a way to generate a return on their excess cash. They offer a higher interest rate than savings accounts, and the funds are typically accessible after a set period of years. However, there is also the risk that the interest rate will change over time, which could eat into the return on investment. As such, businesses need to weigh the risks and potential rewards of investing in fixed deposits before making a decision.
When the company deposits cash into the bank account, it has to record the increase of cash on the balance sheet. It is also part of the company cash and reports under the cash and cash equivalent account. The company will earn interest for the length of time that it was deposited. This meant that the company was actually losing out on potential earnings, as it could have invested that money elsewhere and earned a return. However, the company felt that the stability and safety of the fixed deposit account outweighed the potential for earnings, so it decided to go ahead with the deposit.
The bank will pay interest to the company which decides to deposit cash into the bank. It will be recorded as the interest income on the company income statement.
Journal Entry for Fixed Deposit
Fixed deposit is the type of cash at bank that is present under cash and cash equivalent on the balance sheet. So when the company deposits cash into the fixed deposit account, the accountant needs to record an increase in cash account. The cash may be reduced from other accounts such as cash on hand.
The journal entry is debiting fixed deposit accounts and credit cash on hand.
| Account | Debit | Credit |
|---|---|---|
| Fixed Deposit | 000 | |
| Cash on Hand | 000 |
The journal entry will cash from other accounts to the fixed deposit account.
Example
ABC is a consulting company that makes a good amount of cash. The management has decided to deposit some excess cash into the fixed deposit to earn some interest. They decide to deposit $ 25,000 from cash on hand to the fixed deposit at the bank. Please prepare journal entry for the fixed deposit.
The company has brought the cash on hand to the bank and placed it into the fixed deposit account. It will reduce the cash on hand balance and increase the fixed account.
The journal entry is debiting fixed deposit account $ 25,000 and credit cash on hand $ 25,000.
| Account | Debit | Credit |
|---|---|---|
| Fixed Deposit | 25,000 | |
| Cash on Hand | 25,000 |
