If spare cash is placed on a bank deposit, how is it recorded in the accounts?
Money sitting idle in the settlement account was placed on deposit. Which account does it sit in now, and when does interest become income? Accounts 5890, 4830 and 9530, using a carpet factory as an example.
After its spring sales, the "Nafis Gilam" factory had accumulated 300 million soum in its settlement account. The next purchase of raw materials, however, is six months away. So that the money would not sit idle, finance director Shoira opa placed it on a six-month bank deposit. The accountant Akmal asked: "Does this money still stay in 5110?"
No. The money on deposit remains the company's money, but it is now a short-term investment.
Why doesn't the deposit stay in 5110?
5110 "Settlement account" shows money used for day-to-day payments. Money on deposit, however, cannot be freely used until the contract term ends.
Under NAS No. 21, investments made for a period of no more than one year are accounted for in group 5800, and bank deposits are kept specifically in account 5890 "Other current investments". When the deposit is returned, a reverse entry is made.
This separation tells the reader of the statements something important: the factory has 300 million, but it is not ready to be paid to a supplier today.
What journal entries are made?
The example uses a hypothetical annual rate of 16%: this is a figure made up by the author, not a market rate; the actual rate is set in the contract with the bank. Interest is paid to the settlement account every month, and the deposit matures within the same year. One month's interest: 300 000 000 × 16% ÷ 12 = 4 000 000 soum.
| Step | Transaction | Debit | Credit | Amount |
|---|---|---|---|---|
| 1 | Money transferred to the deposit | 5890 | 5110 | 300 000 000 |
| 2 | Interest accrued at month end | 4830 | 9530 | 4 000 000 |
| 3 | The bank paid the interest to the settlement account | 5110 | 4830 | 4 000 000 |
| 4 | Term ended, deposit returned | 5110 | 5890 | 300 000 000 |
| 5 | Interest income closed at the end of the period | 9530 | 9910 | 24 000 000 |
Steps 2 and 3 are repeated six times: 6 × 4 000 000 = 24 000 000 soum of interest income. Step 5 transfers the total accumulated in 9530 at year end to the final financial result.
What if the bank pays the interest in one go at the end?
Under some deposit contracts, interest is paid at the end of the term. Step 2 is then still recorded every month, while step 3 happens only once, at the end.
| Month | Interest accrued (debit of 4830) | Balance of 4830 |
|---|---|---|
| Month 1 | 4 000 000 | 4 000 000 |
| Month 2 | 4 000 000 | 8 000 000 |
| Month 3 | 4 000 000 | 12 000 000 |
| Month 4 | 4 000 000 | 16 000 000 |
| Month 5 | 4 000 000 | 20 000 000 |
| Month 6 | 4 000 000 | 24 000 000 |
At the end of six months the bank pays 24 million soum: 5110 / 4830, and the balance of 4830 falls to zero. Interest is income not of the month in which the money arrives, but of every month in which the money sits on deposit. That is why it is accrued every month.
If the bank deducts a service charge for opening the deposit or for a transfer, it is a separate expense: 9430 / 5110.
Shoira opa's checklist
- When the contract says interest is paid: monthly or at the end of the term
- How the interest is recalculated if the deposit is withdrawn early
- Whether the deposit term fits the payment calendar: the deposit should not still be locked on the day the money for raw materials is needed
Test yourself
5 questions on this topic: pick an option or reveal the answer.
A company transferred idle cash from its settlement account to a six-month term deposit at a bank. What journal entry is made under NAS No. 21?
When cash sales proceeds were handed over to a cash collector, Dt 5710 Kt 5010 was recorded. Now the money has arrived in the settlement account at the bank. What journal entry is made?
The accounting ledger of "Sho'rchi texno" LLC shows a balance of 18 600 000 soum in account 5110. When reconciled with the bank statement, two entries not yet recorded in the ledger were found: a customer payment of 1 200 000 soum was received and a bank service fee of 90 000 soum was charged (hypothetical amounts). After both entries are recorded in the ledger, what is the balance of 5110 under paragraph 225 of NAS No. 21?
A short-term loan received from a bank was repaid on time from the settlement account. What journal entry is made?
A hypothetical commercial bank has loans to customers of 840 bln soums and customer deposits of 1 050 bln soums. What is the loan-to-deposit ratio (loans / deposits × 100%)?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- NAS No. 21 "Chart of Accounts", paragraphs 240 and 243 · short-term investments (for no more than one year); bank deposits in 5890 "Other current investments"; reverse entry when the deposit is returned
- NAS No. 21, paragraphs 210, 216, 416 and 421 · 4830 "Interest receivable"; interest income on current investments on the credit of 9530 in correspondence with 4830; 5110–5530 / 4830 (receipt of interest); 9510–9590 / 9910 (closing at the end of the period)
- NAS No. 21, paragraph 410 · bank service charges in 9430 "Other operating expenses"
- Example, interest rate and amounts · prepared by the author, hypothetical; the actual rate is set in the contract with the bank