When is interest earned on a money market account recorded on the books?

When is interest earned on a money market account recorded on the books?

• A. With a normal transaction entry
• B. With an adjusting entry
• C. With both a transaction and an adjusting entry
• D. Requires no entry in your books

Answer: (C)

In accrual accounting, income is recorded when earned, not when cash is received. Interest on a money market account is earned over the period, so you first record an adjusting entry to recognize that revenue even if the cash hasn’t been deposited yet. Specifically, you would debit Interest Receivable and credit Interest Income for the amount earned. Later, when the bank actually credits your account with the interest, you record a separate transaction to reflect the cash inflow. You would debit Cash and credit Interest Receivable for the same amount, which clears the receivable you set up in the adjusting entry and increases your cash balance. So you need both: the adjusting entry to recognize the earned interest, and the transaction entry to reflect the actual receipt of cash.

In accrual accounting, income is recorded when earned, not when cash is received. Interest on a money market account is earned over the period, so you first record an adjusting entry to recognize that revenue even if the cash hasn’t been deposited yet. Specifically, you would debit Interest Receivable and credit Interest Income for the amount earned.

Later, when the bank actually credits your account with the interest, you record a separate transaction to reflect the cash inflow. You would debit Cash and credit Interest Receivable for the same amount, which clears the receivable you set up in the adjusting entry and increases your cash balance.

So you need both: the adjusting entry to recognize the earned interest, and the transaction entry to reflect the actual receipt of cash.