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 - December |
20,000 |
- |
1,000 |
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 |
