Interest on Deposits

Interest earned on various saving accounts may be credited directly into the accounts by the bank at the end of a month. The account holding company records the interest receipt after it receives intimation from the bank through bank statement. Therefore, until the interest received is recorded in the cash book, the balance as per bank statement will be higher than the cash book balance. The difference needs to be eliminated by adjusting the cash book of the company before the preparation a bank reconciliation.

Example

ABC & Co. earns interest on its saving account of $1000 for the month of December 2010 which has been directly credited to the company's account on 31 December 2010 by the bank. The Company has not yet recorded the interest received in its books. The balance on the cash book shows a balance of $20,000. Bank statement shows the following:

Bank Statement of ABC & Co. for the month of December 2010

Date	Particulars	Opening Balance	Debit	Credit	Balance
01-12-2010		20,000	-	-	20,000
30-12-2010	Interest- Dec	20,000	-	1000	21,000

As the bank has already credited the account of ABC & Co. in respect of interest received, the balance as per bank statement is higher than the cash book balance by $1000. In order to remove the difference, ABC & Co. must record the interest received in its cash book before preparing the bank reconciliation. Following accounting entry must be recorded to arrive at the corrected cash book balance:

		$	$
Debit	Bank	1,000
Credit	Interest Income		1,000