How to account for transferring money to an investment account?

Question

I have recently been asked to look after the books temporarily for a small not for profit sports club in Christchurch New Zealand.

I noticed that they had entered transferring of money from the current account into a investment account (fixed term bank deposit) as an expense. This doesn't seem correct to me, but it has been along time since I studied bookkeeping at school.

The majority of the savings come from an insurance payout, for earthquake damage to the building and grounds, which have been fixed, mostly with volunteer labour.

How should this entry be managed?

Answer 1

Expensing a transfer of funds is incorrect. That will affect the Profit/Loss (Income) statement when you transfer it out and back in, which you do not want, at least for the principle. The interest should be recorded as a interest income.

The general way to account for transferring money is to credit the originating account, and debit the destination account. This will only affect the balance sheet accounts.

For example:
Transferring (buying) 10,000 worth of fix term bank deposits

Fix term bank deposit           10,000
    Checking account                     10,000

Interest is paid:

Checking account                    50
    Interest income                          50

The bank deposit reaches maturity, so the principle is returned, with the final interest payment.

Checking account                10,050
    Fix term bank deposit                10,000
    Interest income                          50

The accounts Checking account and Fixed term bank deposit are asset accounts, which show up on the balance sheet. The Interest income is an income account, which will show up in the income statement. This is how a fixed term/CD is usually recorded.

In certain cases, where the business must follow an accounting standard, this may very well be insufficient, but this situation will be unlikely if it's a small private sports club.

Having said that, double check to make sure what you've stated is indeed correct, and look back into the past entries to see how it was dealt with before, especially since you said this bookkeeping job is temporary. I would strongly advise against changing non-recent entries, even if they are incorrect.

For the insurance payments, that would depend on how the damaged assets were accounted for. It's a little hard to say without more detail-- the extent of the damage, how the diminished value was accounted for in the books, the cost of repair materials, etc.