Debit and Credit Ledger selection on Accrued Interest on Bank Fixed Deposits.

When anyone opens a Fixed Deposit/Term Deposit Account in Bank, The Bank provides a Deposit Certificate to the Customer/Account Holder either in online or offline mode with mentioning the Date of Deposit, Date of Maturity and Rate of Interest.

Periodically, Bank Credits/adds interest on Fixed/Term Deposits to the Principal amount of Fixed Deposits which is not paid to Customer/Account Holder on the date of Credit. That amount of interest, which is payable by the Bank to the Customer is termed as 'Accrued Interest on FD' in the Customer's Books of Account.

For more understanding on Accrued Interest on FD, Let's take an example.

Mr.Debasis oped a Term Deposit Account in HDFC Bank Ltd. on date 01/07/2020 for ₹50000/-.

FD A/c No- 123000321, Date of Issue - 01/07/2020, Date of Maturity - 30/06/2023, Rate of Interest@7% p.a.

Amount of Interest credited by HDFC Bank Ltd. on date 31/03/2021 is ₹2625/-. So, the FD amount increased by ₹2625/- i.e FD amount on date 31/03/2021 is ₹52625/-(₹50000 + ₹2625)

Here, Principal amount of FD is ₹50000/-

Accrued Interest on FD amount is ₹2625/- as on date 31/03/2021.

Journal Entry for Accrued Interest on FD on date 31/03/2021 in the Books of Mr. Debasis.

Steps and Procedures for Decision making for Debiting and Crediting of Ledger Accounts of the above transaction.

Step - 1

In first step,we have to identify the Ledger Accounts involved in the above transaction.

As a result,we found two Ledger Accounts.

1) HDFC Bank FD A/c No-123000321

2) Accrued Interest on FD.

Debit and Credit Ledgers - Accrued Interest on FD

Step - 2

In second step, we have to find out the Type of Ledger Accounts involved by using either one of the Accounting Approach.

The above two Ledger Accounts mentioned in step-1 are related to type

Real Account(HDFC Bank FD A/c No-123000321) and Nominal Account(Accrued Interest on FD) in Traditional Approach.

Asset Account(HDFC Bank FD A/c No-123000321) and Income Account(Accrued Interest on FD) in Modern Approach.

Type of Ledger Accounts involved - Accrued Interest on FD

Step - 3

In third step,we have to look at the nature or flow of the Ledger Accounts involved by using either one of the Accounting Approach.

HDFC Bank FD A/c No-123000321 comes in, and Accrued Interest on FD A/c is an Income in Traditional Approach.

HDFC Bank FD A/c No-123000321(Asset Account) increases and Accrued Interest on FD A/c(Income Account) increases in Modern Approach.

Flow of Ledger Accounts involved - Accrued Interest on FD

Step - 4

In fourth and final step,now it is time to place the Ledger Accounts in their respective column, i.e Debit Column or Credit Column by applying the Debit and Credit Rule using either one of the Accounting Approach.