Examination Timing: 00H02M14S
A firm is acting on behalf of a client in a litigation matter. The claim by the client has now been settled and damages have been received by the firm. The firm retains the funds on client account for two weeks whilst the client has a holiday. The firm decides to pay the client interest for the two weeks it has held the funds.
Which of the following should be included in the postings that record the payment of interest?
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Your selected option: B
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When a firm decides to pay interest to a client for holding funds, the interest payable ledger is debited because it represents an expense to the firm. The business account is credited to reflect the outflow of funds from the firm's account to the client.
Key Point: Interest paid to clients for holding their funds is recorded by debiting the interest payable ledger (an expense) and crediting the business account (reflecting the outflow of funds).
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