When a business has surplus cash it might chose to place it on deposit for a period of time in order to earn interest. The movement of cash from the bank current account to a fixed deposit account needs to be recorded using a fixed deposit journal entry.
For example, if a business owner has surplus cash of 4,000 and places this on deposit with a bank, then the bookkeeping journal entry would be as follows:
Fixed Deposit Journal Entry
The accounting records will show the following bookkeeping entries for the fixed deposit.
|Fixed deposit account||4,000|
Fixed Deposit Journal Entry Bookkeeping Entries Explained
The surplus cash placed in the deposit account is an asset, and is reflected in the accounting records by the debit entry.
The cash is removed from the cash account which is reduced by the credit entry.
The Accounting Equation
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus equity of the business. This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.
|-Cash + Deposit||=||None||+||None|
|-4,000 + 4,000||=||0||+||0|
In this case, one asset (cash in the current account), is reduced by the credit entry as the cash is transferred to the deposit account. This is balanced by the debit entry, which increases another asset (cash in the fixed deposit account), to reflect the cash transferred from the current account.
The fixed deposit account is an asset and will be shown on the balance sheet as either current or non-current, depending on whether the term of the deposit is less than or more than one year from the balance sheet date.
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