Typical Transaction 12
Example: Adjustment for Interest Earned on Bank Deposit: Interest Rate at 10% on Cash at Bank end of period balance
The entries for this transaction in the Accounting System can be seen here, in the AccountingLab and in the Accounting System, Operation O35C, Q1:
| Adjustment for Interest earned on bank deposit at 5% pa | Increase in Debtors (+) |
|---|---|
| Increase in Retained Earnings (+) |
| Balance Sheet | ||
|---|---|---|
| Original | After Changes | |
| Assets | ||
| Current Assets | 767,850 | 843,705 |
| Bank | 758,550 | 758,550 |
| Debtors and Prepayments | 9,300 | 85,155 |
| Other Current Assets (Stock) | 0 | 0 |
| Fixed Assets | 44,000 | 44,000 |
| TOTAL ASSETS | 811,850 | 887,705 |
| Liabilities | ||
| Current Liabilities | 44,300 | 44,300 |
| Creditors | 44,000 | 44,000 |
| Accruals | 300 | 300 |
| Long Term Liabilities | 0 | 0 |
| Long Term Loan | 0 | 0 |
| Equity | 767,550 | 843,405 |
| Shareholders’ Equity | 800,000 | 800,000 |
| Income Statement | -32,450 | 43,405 |
| TOTAL Liabilities + Equity + Retained Earnings | 811,850 | 887,705 |
Current ratio calculations are as follows:
| Current Assets | Debtors and Prepayments | Creditors | Current Liabilities | Income Statement | Equity | Current Ratio | |
|---|---|---|---|---|---|---|---|
| Balance Sheet Original | 767,850 | 9,300 | 44,000 | 44,300 | -32,450 | 767,550 | 767,850 / 44,300 = 17.3 |
| Balance Sheet New | 843,705 | 85,155 | 44,000 | 44,200 | 43,405 | 843,405 | 843,705/ 44,300 = 19.0 |
When booking unearned income (interest in bank deposit, 10% of cash balance), due but not yet paid by the Bank at the end of the period, as in this example, the following changes occur in the Balance sheets (B/S) and the Income Statement:
– Current Assets increase in the new B/S by new unearned amount calculated as follows: 10%*Cash at bank balance = 10%*758,550 = 75,855. New current assets balance: 758,550 + 75,855 = 843,705.
– Current Liabilities remain the same in the new B/S.
– Current Ratio change in the new B/S from 17.3 to 19.0. It means there is an increase in liquidity as the amount to be received from the Bank is 100% sure to be received in the very short term, a matter of days at the beginning of the next accounting period.
– The Income Statement increases by 75,855. The new balance becomes: (-32,450) + 75,855 = 43,405. Equity increases by the same amount.