How are bank service charges and interest income recorded in the accounting records?

• A. Bank service charges decrease cash; interest income decreases expenses.
• B. Interest income is recorded as revenue; bank service charges are ignored.
• C. Bank service charges increase expenses; interest income increases other income; both adjust cash and the related accounts.
• D. Bank service charges and interest income have no impact on the cash balance.

Answer: (C)

When recording bank activity, you treat charges as an expense and interest as revenue, and both affect the cash balance and the corresponding accounts. Bank service charges are costs of banking, so you debit the Bank Service Charges expense and credit Cash, which reduces cash and increases expenses. Interest income is revenue earned from the bank; when cash is received, you debit Cash and credit Interest Income (or Other Income), increasing cash and recognizing income. This shows why both items adjust cash and their related accounts in the proper directions. The other options miss that bank charges are expenses, that interest income is income, or that these items can be ignored.