There may be interest paid or received on the bank statement that is not yet recorded in the general ledger.

Example

ABC Clothing has a general ledger cash balance of 1,000,000 RWF. The bank statement reflects a balance of 1,002,000 RWF.

Upon comparison of the general ledger and the bank statement, the accountant notices that the bank paid interest to ABC Clothing of 2,000 RWF on the last day of the month. This income must now be booked in the general ledger.

Qs: What is a bank interest? When is it charged?

Go bullet and go through example

Qs: Thinking back to our elements of financial statements – what element is the interest charge?

How do we record the journal entry?

Walk through example.

The key question here is why do we adjust the ledger?

Let’s go back to our definition of a transaction

1.Probable

2.Reliably measure

In this case, it is 100% sure the charge will happen (the bank has already taken our money and we likely have an agreement signed in the past). It is 100% reliably measured for the same reason – we have been charged the amount by the bank. Therefore, we have a transaction and we need to record it.

Qs: And what is the journal entry required?

Debit – Cash  2,000

  Credit – Interest income  2,000

If the bank statement reflects interest paid to the bank, the reconciliation and journal entry will be the reverse. A credit to cash and a debit to interest expense.