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I won a legal settlement in which the total amount to be paid to me will be done in instalments. Interest will accrue.

I debited the principal and interest accruals to an asset account and credited an equity account. When I receive a payment I debit a checking account for the amount paid and credit the asset account which correctly decreases the balance owed.

The equity account balance however, with interest credits, continues to grow.

Is this the correct way to set this up?

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  • While answering I remembered that it is actually off topic here, since it is a purely accounting question. I'll leave the answer, but don't be surprised if your follow ups, if any, get closed as off topic. – littleadv Jun 6 '16 at 5:12
  • If it's accounting for personal purposes I think it's fine: money.stackexchange.com/help/on-topic – GS - Apologise to Monica♦ Jun 6 '16 at 5:24
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I debited the principal and interest accruals to an asset account and credited an equity account

Why equity? This is clearly income.

Generally, except for open balances and additional owner's investment - you wouldn't credit the equity accounts, ever.

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  • Payments from a court settlement would not necessarily be income for tax purposes. It would often be appropriate to treat them as capital. – sjy Jun 6 '16 at 6:31
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    @sjy this is accounting question, not taxation. Not every income is taxable, but it doesn't make it any less income. – littleadv Jun 6 '16 at 6:46

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