Journal Entry for Interest Accrued on Fixed Deposit
Accrued interest on a fixed deposit is the process of recording interest income from a fixed deposit before receiving interest from the bank.
A fixed deposit is a type of financial investment where you deposit an amount of money for a set period of time to earn interest on the maturity date. It is a safe way to grow your money, as the interest rate is fixed for the duration of the deposit. Fixed deposits usually have a minimum investment amount and period, and early withdrawal may be subject to penalties. When the fixed deposit matures, you can choose to reinvest the money or withdraw it.
Interest rates on fixed deposits vary depending on the bank and the investment period, but they are often higher than savings accounts. It allows the company to earn more interest compared to other types of accounts. Fixed deposits are a good option if you are looking for a low-risk investment with predictable returns. They are also a useful way to save for specific goals, such as a down payment on a house or wedding. However, you will not be able to access your money until the end of the investment period, so make sure you do not need it in the meantime.
Fixed deposit is one of the most popular investment products. It offers a guaranteed return on your investment, which makes it an attractive option for those looking for a safe and low-risk way to grow their money. One of the main advantages of investing in a fixed deposit is that you can earn interest income on your investment.
When we receive interest from fixed deposits, it means that we have earned money on our investment. The interest is paid out based on the amount of money we have invested and the length of time that we have been invested. The longer we are invested, the more interest we will earn. This is because the longer we are invested, the more time the money grows. Additionally, the more money we invest, the more interest we will earn.
The interest from the fixed deposit will be paid to the company bank account on the maturity date. The bank will transfer both principle and interest at the end of the term deposit. However, the company needs to record revenue based on the accrued basics. It means the revenue needs to record based on the earnings, not the cash flow from the bank.
Journal Entry for Interest Accrued on Fixed Deposit
Based on the bank policy, the deposit principle and interest will be transferred to the customer account on the maturity date. The cash flow from interest income will be transferred to the company on the last day of the term deposit. However, the company needs to follow the accrual basis which requires the company to record revenue based on the earnings, not cash collected.
The journal entry is debiting interest receivable and credit interest income. The amount will depend on the deposit amount and interest rate.
| Account | Debit | Credit |
|---|---|---|
| Interest Receivable | 000 | |
| Interest Income | 000 |
The transaction will increase the interest receivable which is the current assets on the balance sheet.
At the end of the fixed deposit period, company will receive interest earnings from the bank. The company will record cash received and reverse the interest receivable.
The journal entry is debiting cash and credit interest receivable.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Interest Receivable | 000 |
Example for Interest Accrued on Fixed Deposit
Company ABC has deposited $ 100,000 into the bank as a fixed deposit with an annual interest rate of 8%. Based on the bank term, the interest will be credited to the customer account on the maturity date of the fixed deposit. Please prepare a journal entry for accrued interest on a fixed deposit on a monthly basis.
First, we need to calculate the monthly interest income.
Monthly interest income = ($ 100,000 x 8%)/12 = $ 666.66
The company has to record the interest income on a monthly basis to ensure the matching principle. The journal entry is debiting interest receivable $ 666.66 and credit interest income $ 666.66.
| Account | Debit | Credit |
|---|---|---|
| Interest Receivable | 666.66 | |
| Interest Income | 666.66 |
The transaction will increase the interest receivable on the balance sheet. It will be accumulated over the period of a fixed deposit. The balance will be reversed when the bank paid interest on the maturity date.
The interest income will be recorded as $ 666.66 per month on the income statement. The income needs to allocate over the deposit term.