Bank deposit accounts

When companies or individuals have surplus funds over their needs and instead of holding this cash without any financial return, companies in this case make a deposit in the bank for a specific period of time and interest on the amount by which the deposit was made and there are bank deposits, interest on them daily and companies do it to benefit from the interests, instead of holding it in cash without any return, the deposits interest is calculated on a daily basis since the date of linking the deposit to the deposit interest rate.

Types of Bank Deposits

1- A Call Deposit Account\ is the cash deposit that a customer can withdraw at the time when he wants, its interest are simple compared to other types of interest.

2- Time Deposits\ which are deposits in which the contract stipulates that the customer cannot withdraw or dispose of the deposit except after a specific period of time has passed since the deposit date, which may be for a month, several months, a year, or several years, according to the terms of the contract and the bank’s laws& regulations. This type of deposit usually has a better interest rate than the previous type due to the bank's ability to invest and dispose of the deposit for a specific period of time stated in the contract.

3- Fixed Deposit\ a deposit assigned to a letter of guarantee in the sense that it is considered a guarantee for the bank against the issuance of a letter of guarantee to the company and this type of deposit cannot be recorded and transferred in cash only after the return of the letter of guarantee and the expiry of its duration and this is in the case of companies that cannot open the letter of guarantee facility account.

4- Notice Deposit Account\ is the deposit that the customer can receive at any time, but he must inform the bank in advance of his desire to withdraw the deposit or withdraw part of it. Here the customer is required to inform the bank several days before (or other period that according to the terms of the contract and the bank's laws) of his desire to receive the deposit or whatever amount he wants from it, and therefore the customer will receive the amount after a period from notification of the bank. Also, a return of the deposit is received here, but it is less than the previous type due to the limited ability of the bank to invest the deposit, and the return increases the longer period of the deposit.

Of course, any of these types may differ in their advantages and characteristics between one bank and another, and according to the bank’s laws and policies and it’s mechanism of work and its financial and banking transactions, consequently, in some banks you may find other types of deposits between investment deposits, savings deposits, long-term deposits, and other short-term deposits, as well as the difference in the returns ratio and profits that the bank provides for each type of bank deposit, banks always strive to encourage individuals from different small, medium, and large venture capitalists to invest in different types of bank deposits, by providing a set of options that suit the needs of different its clients and its customers.

Accounting processing of bank deposits

In principle, any deposit has two dates, the date of linking the deposit, and the date of the deposit accrual, meaning that when an order for issuing a deposit is made, this order will be a fixed-term that means its due date and select in it, the deposit value and the interest rate, and write the customer’s name, account number, signature, and when creating the time deposits by depositing a cash amount or by withdrawing an amount from the current account

Practical example

The customer entered into a contract with the bank for a deposit for a period of 3 months on January, at a value of 100,000 deducting from the current account at an interest rate of 12%, the customer asked the bank on the due date to add the interest in the deposit to the current account

First, Journal entry linking any deposit

And interest is calculated on a daily basis that is calculated daily and interest is added to the current account at the end of each month and at the end of each quarter according to the contract with the bank

 Interest= 100000 * (3/12) * 12% = 3000

According to the accrual basis, the accrual journal entry of deposit interest monthly is created and each month is allocated with its share of the interest income

And accrual journal entry of interest on January

And accrual journal entry of interest on February

And accrual journal entry of interest on March

When the interest is accrued after the 3 months, the journal entry is as follows 

And according to the deposit contract, there is another option, which is that sometimes the value of the deposit interest is added to the deposit and it is not added to the current account and the journal entry is as follows

This of course will increase the value of interest in the following period as a result of increasing the value of the deposit after adding the value of the interest to it and the deposit when approaching to the date of accrued its interest, either as it adds the interest of the deposits on the value of the deposit and the interest is calculated in the new value and this is according to the bank’s agreement with the customer

At the end of the term of the deposit accrual, there are two options for the company

First, the deposit is not renewed a second time

And the accounting journal entry is as follows

Secondly, renewal of deposit again

It is by agreement and according to its terms and in banks the deposit is renewed automatically if the customer is signed in to order the deposit that the deposit is renewed automatically and the interest value is added to it or that the interest is added to the current account directly and the deposit is renewed at its value only and this is all according to the terms of the agreement with the bank and in the case of breaking the deposit before accrued, the bank gives a percentage of the interest and subject matter negotiated by the bank and the customer

First, the interest Period is added to the current account

The deposit is renewed at its value

Secondly, the interest is added to the deposit and the deposit is renewed by the interest

Foreign Currency Account 

When the company has a deposit account in dollar (USD) or current accounts in dollar (USD) or treasury in dollar (USD), all processes are recorded in the equivalent in local currency and at the same time the actual balance of the foreign currency must be known at any time and this is through good accounting software or it can be prepared by Excel, so that at any time the value of the balances in foreign currencies and their equivalent in the local currency (Egyptian pound) is known at any time, so that the company can manage its foreign currency needs and each purchase transaction in dollar is recorded at the exchange rate at the purchase date and also when paying and transferring an amount in dollar from the company's account, its value is recorded at the exchange rate on the date of transfer

Practical example: Al-Salam Company deposited $ 10,000 in the company’s National Bank of Egypt current account is in dollar, by depositing 5,000 dollar in the treasury of the company and buying $ 5,000 from the exchange company, the American dollar exchange rate was equal to 15 Egyptian pounds

And it is possible to first creating a journal entry of purchasing dollars from the market through the treasury in Egyptian pounds, then creating a transfer journal entry from the company's treasury in Egyptian pounds to the treasury in dollar (USD)

The journal entry is as follows

Then, 10,000 dollars will be transferred from the treasury in dollar (USD) to National Bank of Egypt current Account in dollar (USD), and the journal entry is as follows 

Secondly, The Company has transferred 10,000 dollars to an external supplier at an exchange rate of 16 Egyptian pounds

Thus, each transaction is recorded, whether a deposit transaction is recorded at the exchange rate on the date of the transaction, and any process of transferring the exchange from the current account in dollar (USD) to the company or the dollar treasury account is recorded by the average exchange rate in the company’s accounts and the average is calculated with each process and it equals the value of the balance in the local currency/ the value of the balance in dollar

In other words, the current balance of National Bank of Egypt is $650,000 in books, and the actual balance is $ 42,000, so the average exchange rate is equal to 650000/42000 = 15.47 Egyptian pounds

Therefore, foreign currency accounts must recording transactions that occur to a foreign exchange in local currency equivalent in the books according to generally accepted accounting principles (GAAP), also, the bank accountant must know the value of the actual balance in dollar.

Foreign Currency Valuation

At the end of each fiscal period, the foreign exchange balances must be evaluated, and in practical reality, the companies evaluate at the end of each month, meaning that the company at the end of the month was the current balance of National Bank of Egypt in dollar (USD) $ 50000 and the value of the company’s books was in Egyptian pound (EGP) 650,000, meaning that the average exchange rate equals 13 Egyptian pounds, (the dollar (USD) equals 13 Egyptian pounds) and the dollar (USD) rate according to the central bank at the end of the month was 13.5 Egyptian pounds, thus, the value of the dollar (USD) has risen, and therefore there are exchange rate differences- credit memo for the company, which are 13.5-13 = 5 Egyptian pounds

And the balance of the U.S. dollar is $50,000, so there are exchange rate differences- credit memo at value of = 50000 * 0.5 = 25000

The journal entry is as follows

In another assumption that the dollar rate according to the central bank was 12.5, so there is a fall in the value of the dollar at value of 5 Egyptian pounds, and therefore there are exchange rate differences- debit memo and the current account of National Bank of Egypt must be decreased at a value of 50,000 * 0.5 = 25,000 Egyptian pounds

The journal entry is as follows

Reviewing Deposits Accounts  

In order for reviewing deposits accounts properly, there must be a set of steps, which

- Preparing an analysis of bank balances of deposits, as well as bank accounts, bank certificates, and notifications of linking deposits on the date of preparing the financial statements.

- Matching the analysis to the trial balance and the books on the date of preparing the financial statements and matching the analysis with the bank accounts on the date of preparing the financial statements.

- Matching the opening balances with the books with the closing balance at the end or previous year or the approved financial statements for the previous year and matching the analysis with the bank’s certificate at the date of preparing the financial statements.

- Translating the balances of deposits in foreign currencies into the currency of the books on the date of preparing the financial statements.

- Verifying the validity of calculating the returns of deposits accrued according to the notifications of linking for each deposit separately and verifies the balance, the commission rate (interest), and the due date.

Deposits and Financial Statements

Interest earned on the company from deposits are listed on the income statement after the operating profit of the company and the deposits interests are also included in the cash flow statement within investing activity and they are considered an internal cash flow and the deposits value is included in the current assets within the cash items and so on if the maturity period of the deposit within 3 months from the date of the financial statements.