Interest allowed by bank journal entry according to golden rules of accounting

Hi good morning SIR
First of all I would like to thanks for your valuable suggestions
I have a query on journal entry
question:- Interest allowed by bank
journal entry Bank A/c Dr
To Interest Received A/c

could you please explain this transaction by applying Golden Rules of accounting
I'm in dilemma as per nominal account interest is a gain so we credited & why we are debiting BANK A/C ? as per personal A/c receiver should be debited but hear bank is giving interest to us and why we are debiting BANK A/c?

                               Thanks A lot  sir in Advance
asked Nov 25, 2015 in Journal Entries by RAhul reddy (13 points) 6,032 views

1 Answer

+1 vote
Hi Rahul, let me explain this to you with the help of an example:

Ram is our tenant who pays us Rs.1000 through cheque as rent.

What should be the journal entry for above?

1.   Bank A/c           Dr.  1000      

            To Rent A/c                              1000


2.  Bank A/c           Dr.  1000

            To Ram A/c                              1000

Journal entry 1. is correct because it records receipt of money in bank (Debit what comes in).  Rent A/c is being credited because all Incomes/Revenues are credited..

Journal entry 2 is wrong because it wrongfully credits Ram.  As Ram is neither our debtor or creditor, so he cannot be a giver.  I will give you another example for this.  If we sell goods to Ram and he pays cash for it, then we credit Sales A/c and not Ram A/c because we are receiving cash against sales and not from Ram (since Ram is neither our debtor or creditor).

I hope I have made my point clear and from above it follows that when bank pays us interest, our balance with bank increases, so bank is a receiver in a way, so it is debited.  Your confusion arises from the fact that on the one hand bank balance is increasing and on the other bank is paying interest.  Since we are receiving money on account of interest, that is why interest account is credited and not the bank (since bank does not owe us interest because the moment interest becomes due, it pays us, just like cash payment).
answered Nov 25, 2015 by jbsclasses (3,971 points)
Thank you very much sir