Accounting for "Returned Interest" from Financial Institutions
When you refinance your funds at a financial institution, you may receive back the overpayment of interest you have already paid on the loan (hereinafter referred to as "returned interest"). The passbook would be printed as "reversion interest," "returned interest," "modosirisoku," or so on.
How should the accounting treatment (journal entry) be handled in this case?
Returned interest is a refund of interest paid to date. Therefore, if the account title "Interest expense" is used for interest payments, the account, "Interest expense" should be used as well, and the entry should be made in the credit account.
Suppose that 110 yen of interest paid is back to a savings account,
(Savings Account) 110 (Interest Expense) 110
Above are the journal entries.
However, please note that if an account item such as "prepaid expenses" is used for the interest payment, "prepaid expenses" should be used for the credit.
(Savings Account) 110 (Prepaid Expenses) 110
*In addition to the above, with a full repayment, prepaid expenses account should be changed to interest expense account.
When interest paid is recorded as a credit, it is a "non-taxable purchase return" and when prepaid expenses are recorded as a credit, it is a "not subject to taxation". In either case, there is no impact on the amount of consumption tax.
You may often encounter deposits and withdrawals recorded in a bank book whose contents are unclear or unfamiliar at first glance. Even in such cases, it is necessary to understand the contents in order to perform proper accounting treatment.