Accounting for interest on fd

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Nupur Sharma (Querist)
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24 June 2013 I have been on a lot of audits during my articleship and almost everywhere I observed this uniform accounting procedure in respect of interest on fixed deposits. The FD was recorded at the principal value and interest was booked at the end of each year separately(from TDS certificate received from bank).

However, currently where i am working I observed while reviewing the accounts that FD A/c has been debited at principal value when FD was opened & thereafter half yearly interest has been debited to FD a/c only.

I found this principally incorrect.
These fixed deposits have been opened on auto renewal basis. i.e at the time of maturity it is automatically renewed by the bank and the principal amount along with interest accrued becomes the new "deposit" amount. Could this be the reason for debiting interest in the books in FD A/c itself??
I am a little confused. Please help me and tell me the correct accounting procedure with entries for interest on FDR which accrues at the end of the year.

Thanks in Advance

Dintakurthi Tirumala

Dintakurthi Tirumala (Expert)
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24 June 2013 The both the accounting policy is correct. I will give clarification to your but before please give answer to the followings.

1) What is the auto renewal frequency period of FD.

2) Is Such interest on FD account recognising in P&L also.

OM SAI SRI SAI JAI JAI SAI

Nupur Sharma

Nupur Sharma (Querist)
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24 June 2013 1) Auto renewal period is 366 days.
2) Yes, interest is being recognised in P&L

The auditors always raise an objection that FD should be shown at principal value in the books.

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CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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24 June 2013 My view, debiting interest in the FD itself is not proper treatment. the interest need to be shown separately under accrued interest and while renewal the same can be debited into fixed deposit. FD always shown in principal value only

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Dintakurthi Tirumala

Dintakurthi Tirumala (Expert)
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24 June 2013 Then, If bank also paying interest half years and the accrued interest amount crediting to The FD account then the treatment of company is proper and acceptable because of Interest accrued on FD is receiving and the same amount is giving credit to the FD i.e interest amount also re-investing in FD so the company's treatment is proper and correct.

In case bank either not paying interest half yearly or paying half yearly but didn't giving credit to the FD account(I.e means bank also maintaining separate account like interest payable means not giving credit to the company's account) then the company's treatment is wrong and auditor's objection is correct because of interest amount not invested in FD as well as you just estimating the interest receivable amount and not sure till giving credit to FD account or paying of interest amount so we can't treat it as FD and didn't give debit to FD.

So in one word is the interest payment frequency is Half yearly then company's treatment is proper and acceptable otherwise Auditor's objection is correct as well as has to follow the CMA Ramesh Krishna's suggestion.

OM SAI SRI SAI JAI JAI SAI

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Dintakurthi Tirumala

Dintakurthi Tirumala (Expert)
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24 June 2013 For any further clarification. Please write query/Doubt.

OM SAI SRI SAI JAI JAI SAI