Accounting for interest on fd??

A/c entries 5300 views 10 replies

Nupur Sharma

431 Points Posted on 24 June 2013

I have been on a lot of audits during my articleship and almost everywhere I observed this uniform accounting procedure in respect of interest on fixed deposits. The FD was recorded at the principal value and interest was booked at the end of each year separately(from TDS certificate received from bank).

However, currently where i am working I observed while reviewing the accounts that FD A/c has been debited at principal value when FD was opened & thereafter half yearly interest has been debited to FD a/c only.

I found this principally incorrect.

These fixed deposits have been opened on auto renewal basis. i.e at the time of maturity it is automatically renewed by the bank and the principal amount along with interest accrued becomes the new "deposit" amount. Could this be the reason for debiting interest in the books in FD A/c itself??

I am a little confused. Please help me and tell me the correct accounting procedure with entries for interest on FDR which accrues at the end of the year. Thanks in Advance

Replies (10)

Dimple

252 Points Posted on 24 June 2013

FD acoc*nt is debited becouse the interest might have been reinvested in FD. If this is the case entry should be:

FD A/c Dr.

To Interest on FD (this will be trf to P&L)

And if FD interest is not reinvested then entry should be:

Accrued interest on FD Dr.

To Interest on FD

I hope this is of help.

Mihir

Wealth Manager

5293 Points Posted on 25 June 2013

Please check if the interest received is deposited in another bank account or a cheque is sent by the bank to the FD holder. If the interest received is deposited back in the principal FD account, then the above entry is correct. The interest is cumulated into the FD account and interest on FD is compounded on the addtional interest received as well.

Ramanuj

Accountant.

834 Points Posted on 25 June 2013

Dimple is right answer.

thanks

RAVITOSH KUMAR

Executive

324 Points Posted on 25 June 2013

Accounting suggested by Dimple is correct and ensure that interest amount is shown as income in P& L A/c

Rupesh Soni

Taxation Consultant & CA final student

504 Points Posted on 25 June 2013

Thams up....agree with dimple

modassir jamal

accountant

51 Points Posted on 25 June 2013

Fdrs are made either accrual interest (monthly,quarterly,half yearly or yearly basis) or interest recievable basis. If FDRs are made on accrual interest then the entry will be as; FDR A/c (dr) Accd. Intt. on FDR A/c (cr)(To be shown in P/l A/c) If FDRs are made on Intt. receivable basis then the accounting entries will be as; Cash/Bank A/c (dr) Intt. Received on Fdr A/c (cr) (To be Shown in P/l A/c.

modassir jamal

accountant

51 Points Posted on 25 June 2013

pratyush

delhi

23 Points Posted on 25 June 2013

Agreed with Mr. Mihir....gone through same problem and after discussion with sir and friends....concluded same.

Ritesh Jain

CA CS in Job

675 Points Posted on 28 June 2013

For flexi accounts or accounts where FD interest gets reinvested automatically or where the intrest crediting system of bank is shorter than duration of FD but with reinvestment..the interest amount is treated as principal investment and corresponding income is booke that is asset gets debit an income gets credit.. Hope this clarifies