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Circular No. 55
Senes o f 1918

O F F IC E R S

D IR E C T O R S

R . L . V A N Z A N D T , G OV ERNOR

W . F . R A M S E Y . C H A IR M A N A ND

J . W . H O O P E S . D E P U T Y G O V ERNOR

federal reserve agent

W . B . N E W S O M E , . D E P U T Y CHAIRM AN
J. J. C U L3E R TSO N .
.
PA.RIS, T E X A S
F R A N K K E L L . . W IC H IT A F A L L S . T E X A S
B . A . M C K IN N E Y , . . D U R A N T . O K L A .
M A R IO N S A N S O M , . F T . W O R T H . T E X A S
JN O . T . S C O TT.
. . H O U S TO N . TE X A S
E . K . S M IT H , . . . S h r e v e p o r t . L a .
H. O. W O O TEN ,
. . A B IL E N E . T E X A S

L Y N N P. T A L L E Y , C A SHIER
R . R . G I L B E R T . A S SIS TA N T C A SH IER
P A U L G . T A Y L O R . A S S IS TA N T C A SHIER
R . B . C O L E M A N . A S SIS TA N T C A SHIER
F R E D H A R R IS , A S SIS TA N T CASHIER

F ED ER AL RESERVE BANK

EL PASO B R A N C H

OF

SAM R . L A W D E R . M a n a g e r
j . M . P R O C TE R . C a s h ie r
P A U L S. M I L L E R . A S S IS TA N T
FEDERAL RESERVE A G E N T

DALLAS

C H A R L E S C . H A L L . A s s is t - ------, _ ^ c.k X l R e s e r v e A g e n t
. . . c . W E IS S . .
. . . .
A U D ITO R
C H A S . c . H U F F ..............................C o u n s e l

'interest Earned But Not C o lle c te d
"Interest and Discount Collected or Credited But Not Earned
Method o f Accrual.
In the matter of items “ Interest earned but not collected * * *” and “ Interest and discount collected
or credited and not earned * * *” as called for by lines Nos. 21 and 27 of “ Report of Condition” required
by the Comptroller of the Currency, the following- suggestions are offered for whatever value they may be
to our member banks.
It will be necessary to open general ledger accounts under the above captions, the account first men­
tioned being on the debit side and the one last named on the credit side of the ledger. As interest or dis­
count is actually earned, transfers will be made to a third account entitled “ Interest & Discount,” which
will be set up on the credit side of the ledger and which is intended to show only interest and discount
that has been actually earned.
An auxiliary record will be necessary for the purpose of effecting accrual of such earnings, the follow­
ing form being suggested, a separate sheet to be used for each rate of interest or discount:
M O N TH ....... ................................... ...........
DAY

LOANS MADE (Dr.)

LOANS PAID (Cr.)

R A T E .......... ................
BALANCE

j INTEREST EARNED

1

2

j

3

1

4

(31 lines to the sheet— one for each day of the month).
As the accounts “ Interest earned but not collected * * *” and “ Interest and discount collected or
credited but not earned * * *” are independent of each other, separate accruals will be necessary. By way
of illustration, one accrual sheet for the rate of 6% will not suffice for both accounts, but it will be necessary
to have separate sheet for each account covering each rate of interest or discount employed, though the same
form of sheet can be used in either case.
As a preliminary in order to open the ledger acco unts named and to start the necessary accrual, the fol­
lowing suggestions are in order, to properly maintain auxiliary records heretofore mentioned.
“INTEREST EARNED BUT NOT COLLECTED * * *”
Items under this heading will be those on which no interest has been collected or credited. It will
therefore be necessary to calculate the interest oil such items up to the date that accrual record is opened.
The grand total of accrued interest on all such items will be charged to “ Interest Earned but not collected
* * *” and credited to “ Interest & Discount.” It will also be necessary to classify these items according to
the interest rates, opening a separate accrual sheet for each rate and entering thereon in balance column the
total (principal) of items bearing such rate.
“INTEREST & DISCOUNT COLLECTED OR CREDITED and NOT EARNED * * *”
Items under this heading will be as follow s:
(1) Notes from which discount has been deducted.
(2) Notes that bear interest from date, such interest having been added to face of note.
(3) Notes bearing interest from date to which interest has been added, discount being calculated on
maturity value, i. e., face plus interest.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

In the case of the above mentioned items it will be necessary to calculate the UNEARNED IN T E R ­
EST AND DISCOUNT from the date of opening- accrual records to the maturity of such paper. (This, it
will be noted, is directly opposite to the calculation for “ Interest earned but not collected,” in which case
interest was calculated FROM D A T E ). The grand total of unearned interest and discount on these classes
of paper having been ascertained, entry will be made debiting “ Interest & Discount” and crediting “ Interest
and discount collected or credited and not earned.” The paper will now be classified according to rates of
interest or discount, a separate accrual sheet being opened for each rate and total (principal) of items bear­
ing such rates entered in balance column.
“ M ETH OD O F ACCRU AL”
All balances having been entered on accrual sheets for each rate of interest or discount, a recapitulation
of such balances should agree with total of “ LOANS & DISCOUNTS” as shown by the general ledger.
Each rate should be debited daily with loans made under it and credited with loans paid, interest then being
calculated for one day on the resulting balance. Entries will be made debiting “ Interest earned but not
collected” and crediting “ Interest & Discount” with total interest accrued under the various rates. Entries
will likewise be made debiting “ Interest and Discount collected or credited and not earned” and crediting
“ Interest & Discount” with total of interest accrued under the separate rates.
In case it is desired, calculations of discount earned can be made weekly instead of daily. While it
will be necessary to make daily postings under captions “ Loans Made” and “ Loans Paid,” extending dail}'balances, instead of making- calculations daily on such balances, the same result will be Obtained by simply
making a total of the balances for the week and computing interest thereon for one day, as if separate cal­
culations -were made on the various balances.
The following is suggested as a simple method of calculating interest on balances:
Take 1% of amount involved. To ascertain interest at rates mentioned below, divide by the
amounts shown—
For interest at 4%
divideby 90
For interest at 8% divide by 45
For interest at 5%
divideby 72
For interest at 9% divide by 40
For interest at 6%
divideby 60
For interest at 10% divide by 36
For interest at 7%,
calculate interest at 6% and add one-sitxh toresult.
Illustration: Amount of balance.......................................................... ......................... $180,000.00
1% of amount shown........................ ........................................................... .............
1,800.00
To ascertain interest at 4%, divide by 90, equals ................................ .................
20.00
To ascertain interest at 6% divide by 60, equals .......... .......................................
30.00
The same basis applies to other rates shown. The calculations for rates of 5, 8 and 10%, can be
further simplified by making calculation on basis of 6%, deducting one-sixth from result to get interest
at 5%, and adding one-third for 8%, whereas 10% would, of course, be equivalent to calculation at
9% plus one-ninth of result.

It is a common practice of banks in cases where notes draw interest from date to add such interest to
the face of the notes, charging “ Loans & Discounts” with the total amount. It is unnecessary to state that
in such cases accrual of interest should be made only on the principal amount of such notes, unless, of
course, DISCOUNT has been calculated on their maturity value, i. e., face plus added interest.
Where actual collection of interest has been made under “ Interest earned but not collected,” it should
be credited to this account and not to “ Interest & Discount.” Interest and discount collected or credited
in advance of maturity should be credited to “ Interest & Discount collected or credited and not earned.”
Where notes of this character are paid in advance of their maturity, adjustment should be made covering
any unearned interest or discount that has not been transferred by accrual to “ Interest & Discount.”
Accruals will naturally cease when paper has matured, at which time it should be credited on accrual
records to the rate affected, whether actually paid or not.
A monthly proof of daily accruals made can easily be obtained by totaling the daily balances for the
month and calculating interest thereon for one day, which should equal the various separate calculations
as shown on accrual sheet under “ Interest Earned.”
As interest will be accrued for the actual number of days on a basis of 360 days per annum, this being
common banking practice, the original interest or discount calculations should be on the same basis, as cal­
culations made by “ months” will not reconcile with accruals made by days, particularly where the amounts
involved are large.
Respectfully,

Acting Governor.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102