In Banking Transactions-3, we’ll deal with the interest component and charges levied by bank including SMS charges, passbook issuance charges, etc.
9. Interest charged by bank
Many times, businessmen borrow money from a bank to fulfil their short-term or long-term financial needs. In return, the bank charges a certain rate of interest on the amount lent.
Interest paid is an expense and hence, will be debited. And, since the interest payments have to be made from the bank account, the Bank item will be credited to denote the decrease in Bank balance.
10. Interest paid by bank.
When we give money to a bank by any means, be it a recurring deposit, fixed deposit, savings account, etc., it pays us some interest at a certain rate in return.
This interest received is classified as an income and hence, will be credited. And, this interest amount is directly deposited by the bank in our account leading to a small increase in our Bank balance hence, the Bank item will be debited.
11. Bank charges
Nowadays, banks provide many services like SMS alerts for each and every transaction, IMPS (Immediate Payment Service), the printing of new passbooks, etc. For providing these services, they charge a small amount and deduct it directly from your bank balance.
E.g., Bank of Baroda (BOB), when I’m writing this post, charges about ₹ 17 as SMS alert charges every quarter (i.e., every 3 months).
As for the accounting treatment, Bank charges are classified as Expense and hence, will be debited as and when paid. Secondly, since such charges are deducted from the bank account itself, our bank balance decreases and the Bank item will be credited.
Even when the charge concerned may be change, the journal entry will remain the same i.e., instead of SMS charges, we may have to record some other charge for Passbook issuance, Cheque Book Issuance, IMPS charge, etc. but since they all come under the blanket term of Bank Charges, the entry remains the same. The only change will be in the narration i.e., the sentence written in brackets to briefly mention the transaction below the journal entries.
Endorsement of Cheque
Suppose that we received a cheque as payment from Mukesh, a customer to whom we had sold goods on credit. This cheque, until deposited, is recorded through the Cheques in Hand item as discussed earlier.
On the day when we thought of depositing this cheque, we suddenly remember Mr. Arun and his firm Arun Traders, from whom we had made credit purchases and are yet to make payment.
Now, instead of depositing the cheque, wouldn’t it be nice to simply forward it to Arun Traders as payment of our dues?
Guess what! It is possible in the real world as well. To do so, on the back of the cheque, write ‘Pay to Arun Traders’ and sign it to denote your consent in forwarding the cheque.
This, in technical terms, is called the ‘Endorsement of Cheque’ and it can be said that we’ve endorsed the cheque received from Mukesh to Arun Traders.
There are many more technicalities as to how we endorse a cheque but keeping in line with our subject, we will only focus on the accounting treatment of such a transaction.
Despite not depositing it, endorsing a cheque means we still find a decrease in the number of cheques sitting around in our drawer and hence, the Cheques in Hand item will be credited.
And, this process resulted in a decrease in our liability towards one of our creditors Arun Traders, whom we will tag debit in the entry.
That is it for Banking Transactions: Part 3 and it is also the end of our discussion on banking transactions.
Next, we’ll take a look at special entries that take place in a business and have to be recorded in our books of accounts.
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