# Certificate of Deposit in Accounting

This post deals with the bookkeeping journal entries involved in accounting for certificates of deposit issued by a bank to a business. A certificate of deposit, sometimes referred to as a CD, is a low risk and low return investment used by a business to invest ‘excess’ cash in return for interest.

Certificates of deposit are usually issued by banks for a fixed term and interest rate, and incur significant penalties if the business withdraws its money before the end of the term.

## Certificates of Deposit Investment Journal Entry Example

Suppose a business invests 13,870 in a 60 day, 2.5% certificate of deposit.

The bookkeeping records will show the following certificate of deposit accounting journal entry.
Purchase Certificate of Deposit Journal Entry
AccountDebitCredit
Certificates of deposit13,870
Cash13,870
Total13,87013,870

The certificates of deposit account is a current asset account representing the investment by the business. Depending on the term of the certificate the account is shown in the balance sheet as part of cash and cash equivalents or short term investments.

### The Accounting Equation and the Certificates of Deposit Purchase

The accounting equation, Assets = Liabilities + Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business. This is true at any time and applies to each bookkeeping transaction.

The following table shows the effect of this transaction on the accounting equation. In this example a balance sheet asset account (certificates of deposit) has increased by the amount invested, and another balance sheet asset account (cash) has decreased by the same amount representing the cash payment made.

## Certificate of Deposit at Maturity

At the end of the term of the deposit (60 days) the certificate matures and the bank returns the principal together with the accumulated interest.

### Interest on Certificate of Deposit

The calculation of the simple interest earned on the certificate is as follows.

```Interest = Principal x Rate x Term
Interest = 13,870 x 2.5% x 60/365 = 57
Principal + Interest = 13,870 + 57 = 13,927
```

On maturity therefore the bank returns a total of 13,927 to the business in cash. The certificate of deposit journal entry to reflect the return of cash on maturity is as follows.

Certificate of Deposit at Maturity Journal Entry
AccountDebitCredit
Cash13,927
Certificates of deposit13,870
Interest income57
Total13,92713,927

### The Accounting Equation

The following table shows the effect of this transaction on the accounting equation. The left side of the accounting equation shows that one asset (cash) has increased by 13,927 representing the cash receipt on maturity, and another asset (certificates of deposit) has reduced by 13,870 representing the return of the principal amount.

On the right side of the accounting equation the credit to interest of 57 increases the net income which increases the retained earnings and therefore the owners equity in the business.

## Popular Double Entry Bookkeeping Examples

The certificate of deposit journal entry is one of many bookkeeping entries used in accounting, discover another at the links below.