A discount is simply a kind of loan on which interest has been taken in advance. In most banks the distinction between discounts and loans is purely arbitrary, as interest is taken on some loans in advance as well as on discounts. The accrual method with respect to this classification is essentially the same as that explained in the preceding paragraph. On an auxiliary accrual sheet the amount of loans as of the opening of business each day is shown under each percentage. In the same manner, as was explained, the loans and discounts made and paid are itemized and then summarized, so that the total under each rate remaining at the end of the day is finally shown. In the same manner also the total interest earning on this group for each day is ascertained. It should be remembered that when loans or discounts on which interest is taken in advance are made, the entries are as follows:

Having collected the discount in advance and set it up in a liability account called discount collected but not earned, the following entries are necessary for the amount of income accrued each day:

Debit: Discount Collected not Earned Credit: Discount Earned

It should be apparent that great care must be exercised in setting up these figures, in proving them, and in making adjustments for past due paper, unpaid interest, etc., so that the accrued figures will reflect the actual situation.