What is Bank Deposit in Accounting?
Bank deposits are money that businesses and individuals deposit into bank accounts for safekeeping, savings or investment. In accounting, bank deposits are classified as current assets and constitute an important part of a business's working capital .
What is Bank Deposit?
Bank deposits represent liquid funds placed in financial institutions. These funds are available to the company and can be used for:
- Daily operating expenses and ongoing liabilities
- Short-term, low-risk investments
- Liquidity reserves for unforeseen expenses
- Interest earnings on excess liquidity
Characteristics of Bank Deposits
Bank deposits have several important characteristics that affect accounting:
- High liquidity: Easily available for withdrawal
- Low risk: Protected by the deposit guarantee
- Interest accrual: Provides returns over time
- Currency exposure: Can be in different currencies
Types of Bank Deposits
There are several types of bank deposits with different characteristics and accounting treatment.
Current account (Operating account)
A current account is the most common type of account for businesses and is used for daily transactions.
Features of the User Account:
- Free access to the funds
- Low or no interest rate
- Unlimited number of transactions
- Overdraft facility (overdraft facility)
Accounting of Usage Account:
Debet: Bank (1900) 100.000
Kredit: Kundefordringer (1500) 100.000
Savings account
A savings account is used to invest surplus liquidity at a higher interest rate than a checking account.
Savings Account Features:
- Higher interest rate than a checking account
- Limited access to funds
- Notice period may be required
- Stable placement of funds
Term Deposits (Time Deposits)
Term deposits are deposits with a fixed term and agreed interest rate.
Characteristics:
- Fixed term (1 month to several years)
- Agreed interest rate on deposits
- No access before expiration
- Higher interest rate than savings account
Currency account
Foreign currency account contains deposits in foreign currency.
Special considerations:
- Currency risk due to exchange rate changes
- Conversion to Norwegian kroner in the accounts
- Capital gains/losses due to changes
- Hedging strategies can be used
Accounting for Bank Deposits
Basic Accounting
Bank deposits are recorded in the balance sheet as current assets.
Chart of Accounts for Bank Deposits:
| Account | Description | Type |
|---|---|---|
| 1900 | Bank | Circulating asset |
| 1901 | Usage account | Circulating asset |
| 1902 | Savings account | Circulating asset |
| 1903 | Term deposits | Circulating asset |
| 1910 | Currency account USD | Circulating asset |
| 1911 | Currency account EUR | Circulating asset |
Deposit of Cash
When cash is deposited into a bank account:
Debet: Bank (1900) 50.000
Kredit: Kasse (1800) 50.000
Transfer Between Accounts
When transferring from a checking account to a savings account:
Debet: Sparekonto (1902) 200.000
Kredit: Brukskonto (1901) 200.000
Interest management
Accounting for Interest
Interest income from bank deposits is recorded as financial income.
Accrued Interest (Accrualization):
Debet: Påløpte renteinntekter (1590) 5.000
Credit: Interest income (8050) 5,000
Interest Received:
Debet: Bank (1900) 5.000
Kredit: Påløpte renteinntekter (1590) 5.000
Interest calculation
Simple Interest Formula:
Renteinntekt = Hovedstol × Rentesats × Tid
Example of Interest Calculation:
- Principal: NOK 1,000,000
- Interest rate: 3% per year
- Time: 6 months
- Interest income: 1,000,000 × 0.03 × 0.5 = 15,000 NOK
Compound Interest
For term deposits with compound interest :
| Year | Principal | Interest (3%) | New principal |
|---|---|---|---|
| 1 | 1,000,000 | 30,000 | 1,030,000 |
| 2 | 1,030,000 | 30,900 | 1,060,900 |
| 3 | 1,060,900 | 31,827 | 1,092,727 |
Foreign currency deposits
Conversion to Norwegian Krone
Foreign currency deposits must be converted to NOK in the accounts.
Conversion rates:
- Daily rate: For ongoing transactions
- Balance sheet date rate: For balance sheet
- Average price: For profit and loss items
Capital Gains and Capital Losses
In case of Price Gain:
Debet: Valutakonto USD (1910) 10.000
Credit: Exchange rate gain (8150) 10,000
In case of price loss:
Debet: Kurstap (7150) 5.000
Kredit: Valutakonto USD (1910) 5.000
Bank Reconciliation and Control
Monthly Bank Reconciliation
Bank reconciliation is critical to ensuring correct bank deposits in the accounts.
Reconciliation process:
- Compare bank statement with ledger
- Identify differences and discrepancies
- Investigate causes of deviations
- Correct accounting errors
- Document the reconciliation
Common Reconciliation Items
| Type | Description | Accounting |
|---|---|---|
| Unregistered deposits | Deposits in bank, not in accounts | Debit Bank, Credit relevant account |
| Unregistered withdrawals | Withdrawal from bank, not in accounting | Debit relevant account, Kredit Bank |
| Bank fees | Fees deducted by bank | Debit Bank fees, Credit Bank |
| Interest rates | Interest attributed by bank | Debit Bank, Credit Interest Income |
Tax Consequences
Tax liability for Interest Income
Interest income from bank deposits is taxable income.
For Businesses:
- Ordinary tax rate of 22%
- Accrual accounting according to the Accounting Act
- Deduction for related costs
For Private Individuals:
- Capital gains tax of 22%
- Withholding tax is deducted by the bank (25%)
- Settlement at tax settlement
Deduction right
Costs related to bank deposits may be deductible:
- Bank fees and account maintenance costs
- Currency hedging costs
- Consulting fees
Risk management
Deposit guarantee
In Norway, the Banks' Guarantee Fund covers deposits up to NOK 2 million per depositor per bank.
Important Points:
- Automatic coverage for all banks
- Per depositor and per bank
- Includes interest on the guarantee date
- Payout within 7 business days
Spreading Risk
For larger amounts, risk diversification is recommended:
- Multiple banks to maximize guarantee coverage
- Various products (savings account, term deposits)
- Currency diversification for international businesses
- Maturity spread for forward contracts
Liquidity management
Optimization of Bank Deposits
Effective liquidity management requires a balance between availability and return.
Strategies:
- Liquidity forecast to plan needs
- Staircase deposits with different maturities
- Automatic transfer between accounts
- Interest rate optimization through negotiation
Liquidity reserves
Companies should maintain liquidity reserves for:
- Seasonal variations in cash flow
- Unforeseen expenses and investments
- Market uncertainty and business cycle fluctuations
- Growth opportunities that require quick action
Digitalization and Modern Banking Services
Electronic Banking Services
Modern banking services affect accounting:
- Real-time account balance updates
- Automatic categorization of transactions
- API integration with accounting systems
- Mobile banking for quick access
Accounting Implications
Advantages:
- Reduced manual work during reconciliation
- Faster registration of transactions
- Better control and overview
- Automatic reporting
Challenges:
- System integration and compatibility
- Data security and privacy
- Backup routines in case of system failure
- Competence requirements for staff
Internal Control and Routines
Establishment of Control Routines
Good control routines for bank deposits include:
Daily Routines:
- Checking account balance
- Recording of transactions
- Follow-up of deviating records
- Data backup
Monthly Routines:
- Bank reconciliation for all accounts
- Interest control and accrual
- Currency conversion if needed
- Reporting to management
Division of responsibilities
Role distribution:
- Accountant: Daily registration and reconciliation
- Finance Manager: Monthly control and reporting
- General Manager: Approval of major transactions
- Auditor: Annual review and confirmation
Reporting and Analysis
Financial Reporting
Bank deposits are presented in financial statements :
Balance:
- Current assets - Bank and bank deposits
- Specification of different account types
- Currency distribution when needed
- Restricted funds as a separate item
Cash flow statement:
- Changes in bank deposits
- Interest income from financial activities
- Currency effects on cash
Key figures and Analysis
Important Key Figures:
| Key figures | Formula | Importance |
|---|---|---|
| Liquidity ratio 1 | Current assets / Short-term liabilities | Solvency |
| Cash share | Bank / Total assets | Liquidity level |
| Interest rate return | Interest income / Average bank deposit | Return efficiency |
| Currency exposure | Foreign currency deposits / Total bank deposits | Currency risk |
Future Developments
Digital Currencies
Central bank digital currency (CBDC) could impact the future of bank deposits:
- Direct access to central bank money
- Reduced need for traditional bank accounts
- New accounting challenges and standards
- Changed risk profile for deposits
Sustainable Investments
Increasing focus on ESG criteria influences choice of bank and products:
- Green savings products with an environmental focus
- Ethical investment options
- Sustainability impact reporting
- Regulatory requirements for transparency
Conclusion
Bank deposits are a fundamental part of a company's financial management and require careful accounting treatment. Correct handling of different deposit types, interest income and currency exposure is critical for:
- Accurate financial reports and decision-making basis
- Effective liquidity management and risk control
- Tax compliance and optimization
- Internal control and routines for financial management
By following established accounting principles and implementing good control routines, companies can ensure optimal management of their bank deposits while meeting all regulatory requirements.
For more information on related topics, see our articles on bank reconciliation , working capital , deposits , and balance sheet .