Fixed Deposit Journal Entry
A fixed deposit is a financial instrument a customer deposits 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 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 deciding.
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 move cash from other cash 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 |
Type of Fixed Deposit
Fixed deposits are a popular investment option where individuals deposit a lump sum amount with a financial institution for a predetermined period at a fixed interest rate. There are various types of fixed deposits to cater to different preferences and needs. Here are some common types:
Regular Fixed Deposits: Regular fixed deposits are the most common type, offering a fixed interest rate for a specified tenure. The interest rate remains constant throughout the deposit period, providing stability and predictability to investors. This type of fixed deposit is suitable for those who prefer a steady and assured return on their investment.
Cumulative Fixed Deposits: Cumulative fixed deposits differ from regular ones in the way interest is calculated. Instead of receiving periodic interest payouts, the interest earned is added to the principal amount at regular intervals (usually quarterly or annually). This compounding effect leads to a higher overall return at the time of maturity, making it an attractive option for long-term investors.
Flexible Fixed Deposits: Flexible fixed deposits provide the option to make premature withdrawals before the maturity date. While this flexibility is beneficial, it often comes with the trade-off of a slightly lower interest rate compared to regular fixed deposits. Investors who may need access to funds before the maturity period might find this type of fixed deposit more suitable.
Senior Citizen Fixed Deposits: Senior citizen fixed deposits are tailored for elderly individuals, offering them higher interest rates compared to regular fixed deposits. This is a way for financial institutions to acknowledge and appreciate the contributions of senior citizens. The eligibility criteria typically include an age threshold, and the higher interest rates aim to provide additional financial security for retirees.
Benefits of Fixed Deposit
Fixed deposits (FDs) are popular investment options, especially for risk-averse individuals, and for good reason. They offer a multitude of benefits that cater to various financial needs and goals. Here are some of the key advantages of investing in FDs:
Guaranteed returns: Unlike market-linked investments where returns fluctuate, FDs provide a fixed and predetermined interest rate at the time of investment. This predictability allows you to accurately plan your finances and ensures a steady stream of income.
Capital protection: FDs are one of the safest investment options as they are backed by the bank’s guarantee. Your principal amount is insured up to a certain limit by the Deposit Insurance and Credit Guarantee Corporation (DICGC) in case of bank failure.
Flexible tenures: You can choose an FD tenure that aligns with your financial goals. Tenures range from a few days to several years, offering flexibility to suit your individual needs.
Compounding interest: Reinvesting the interest earned can help you benefit from compounding, which significantly grows your wealth over time.
Regular income: You can choose to receive interest payouts either monthly, quarterly, or annually, providing you with a regular source of income.
Easy to manage: FDs are a hassle-free investment option. The paperwork is minimal, and the account can be easily managed online or through your bank’s mobile app.
Liquidity: While FDs offer guaranteed returns, some allow for premature withdrawals with minimal penalties. This provides a degree of liquidity in case of emergencies.