Investment in Fixed Deposit Journal Entry
A fixed deposit, also known as a term deposit, is a financial product offered by banks and other financial institutions. It allows customers to earn interest on their deposits over a fixed period of time, typically one to five years. Interest rates on fixed deposits are usually higher than those offered on savings accounts, making them a popular choice for savers looking to increase their earnings.
Any company that wants to stay in business must generate a return on its investment. There are several ways to generate an extra return, through dividends, share price appreciation, or reinvesting profits back into the business. Most companies use a combination of these methods.
Share price appreciation happens when the market value of the company’s shares goes up. This can happen for a number of reasons, including strong financial results, positive news about the company, or analyst upgrades. Reinvesting profits back into the business can also generate a return, as it allows the company to grow and expand its operations. Ultimately, any company that wants to stay in business must find a way to generate a return on its investment.
A fixed deposit is a tool that helps generate extra returns when a company has surplus cash. It allows the company to lend money to banks at a fixed interest rate for a specific period of time. The main benefit of this arrangement is that it provides a guaranteed return on investment. This can be helpful in times of economic uncertainty, when other investment options may be more volatile.
Fixed deposits can be an attractive option for risk-averse investors who are looking for stability and predictable returns. As a result, savers should carefully consider their financial goals and risk tolerance before investing in a fixed deposit.
Journal Entry for Investment in Fixed Deposit
Fixed deposit is the financial instrument that a company can use to generate additional returns when they have surplus cash.
The fixed deposit is still classified as cash and cash equivalent on the balance sheet. So the company investment just moves the cash from normal cash balance to fixed deposit cash balance.
The journal entry is debiting fixed deposit accounts and credit other cash accounts.
| Account | Debit | Credit |
|---|---|---|
| Fixed Deposit Account | XXX | |
| Cash | XXX |
The entry increases the fixed deposit account and the cash in other accounts.
Example
Company ABC has surplus cash which is not required to use in the operation. The company decided to invest $ 50,000 in the fixed deposit. The accountant has transferred the cash from saving account to the fixed deposit account. Please prepare journal entry for the investment in the fixed deposit.
Company ABC has transferred cash from the saving account to the fixed deposit amount $ 50,000. They need to move cash from saving to the fixed deposit account.
The journal entry is debiting fixed deposit $ 50,000 and credit saving account $ 50,000.
| Account | Debit | Credit |
|---|---|---|
| Fixed Deposit | 50,000 | |
| Saving Account | 50,000 |