Journal Entry for Fixed Deposit

Fixed Deposit is the amount of cash at company or individual deposit into the bank or financial institute for a predefined time period. The bank will lock the cash for a certain period before releasing it back to the owner with interest. The owner can request the money back before the maturity date, but the interest will be reduced.

The bank usually provides a high-interest rate to fixed deposits if we compare it to a normal saving account. In exchange, the owner must commit to keep their cash for a certain time frame. Most fixed deposits will be 3 months, 6 months, 12 months, or even higher. The account owner needs to keep their money for this period to enjoy the high interest. If they withdraw the money back before the maturity date, their interest will be converted to a saving rate. It is different depending on the bank policy.

The bank will provide interest depending on the term of deposit, and it differs from one bank to another.

Even the cash is locked with bank, the company still records it as cash and cash equivalent. To ensure the correct classification, we have to look at the characteristic of cash and cash equivalent. Cash equivalent is the amount that can be converted to cash almost immediately. It should be low risk, there is no risk in fixed deposit, we can withdraw it any time. It only impacts the interest income.

Journal Entry for Fixed Deposit

Fixed deposit is also under cash section in balance sheet. So when the company makes fixed deposit, it is just the movement of cash from one account to another.

The journal entry should be debit Fixed Deposit account and credit other cash accounts.

It is the movement of cash from saving to a fixed deposit account. Both accounts are present under cash in the balance sheet.

Journal Entry for Fixed Deposit Example

Company ABC has made a deposit in fixed deposit account due to the surplus of cash. They move cash on hand $ 100,000 and deposit it into the fixed account for 6 months to earn the interest of 6% per year. Please make the journal entry for the fixed deposit.

The company has moved cash on hand to cash at bank, fixed deposit account. They have to debit fixed deposit account  $ 100,000 and credit cash on hand for the same amount.

This transaction will decrease cash on hand and increase cash at bank (fixed deposit account). Both accounts are under cash account which presents in balance sheet. Some companies may create several accounts for each deposit while the other may consolidate the deposits into one account only.

At the end of the month, ABC needs to record interest income and interest receivable which will receive on the maturity date.

Interest income = $ 100,000 * 6% per year = $ 6,000 per year

They deposit only 6 months so the interest income is only $ 3,000 during the deposit term. However, ABC needs to record monthly interest income to ensure the matching principle.

Monthly interest income = $ 3,000/6 months = $ 500 per month.

They need to make journal entry by debiting interest receivable $ 500 and credit interest income.

Interest income will be present in income statement. Interest receivable will be present on balance sheet and it will be reversed when the bank pays interest at the end of the term deposit.

The company needs to prepare this journal entry from 1^st month to 6^th month. Interest receivable will increase to $ 3,000 ($ 500 * 6 months).

On the maturity date, the bank will release the money back to the company, they usually deposit the cash to the company saving account. In addition to the principle, bank also deposits the interest into the company account.

To record the transfer back of fixed deposit, we need to debit the saving account $ 100,000 and credit the fixed deposit.

The bank has reversed the cash in the fixed deposit account to the saving account at the end of the term deposit. So the company needs to reflect this movement by increasing the saving account and reducing the fixed deposit account.

To record the interest received, they need to debit cash at bank $ 3,000 and credit interest receivable.

The bank has deposited the interest into a saving account, so we need to reflect this transaction by reveres the interest receivable which is on the balance sheet.

The company does not require to record the income on maturity date as they record monthly income already.