Accounting – 6.4 Interested parties | e-Consult

(a) A savings account is designed for storing money safely and earning interest. Interest is typically paid on the balance. A current account is designed for everyday transactions, such as paying bills and withdrawing money. Interest rates on current accounts are usually very low or non-existent.

(b)

1. Interest rate = 0.5% = 0.005
2. Balance at the start of the month = £5,000
3. Interest earned = £5,000 x 0.005 = £25

(c)

1. Balance at the start of month 1 = £5,000
2. Interest earned in month 1 = £25
3. Balance at the end of month 1 = £5,025
4. Balance at the start of month 2 = £5,025 + £200 = £5,225
5. Interest earned in month 2 = £5,225 x 0.005 = £26.13
6. Balance at the end of month 2 = £5,225 + £26.13 = £5,251.13
7. Balance at the start of month 3 = £5,251.13 + £200 = £5,451.13
8. Interest earned in month 3 = £5,451.13 x 0.005 = £27.26
9. Balance at the end of month 3 = £5,451.13 + £27.26 = £5,478.39

Therefore, the total balance in Sarah's current account at the end of the third month is £5,478.39.