3 Actual Reasons a Deposit in Transit Requires an Adjusting Entry

Want to learn do deposits in transit require an adjusting entry. Read on…

For people without an accounting background, deposits in transit seem complicated for them. However, the concept is really simple. They are cash deposits to a bank but are still outstanding at the end of the month. In addition, this post breaks down what is happening in detail. Also, we will give examples of possible adjusting entries with examples. The examples are explained in detail for real accounting applications.

For deposits in transit that are over a month, an adjusting entry is usually needed. First, it means that the bank has not acknowledged the deposits. Next, recording errors may have been done. Cash deposits are sometimes erroneously recorded in another bank account thanks to multiple bank accounts. Most entities hold different accounts owing to their business operations. In addition, sometimes, the cash deposits did not really happen. The last one is dangerous since the accountable officers did not remit their collections to the bank on time. These problems are prevented when strong controls are enforced.

Deposits in transit may not also require an adjusting entry. For instance, a deposit in transit at the end of the month is normal owing to the time differences. The cash deposit is already recorded in the depositor’s record but not yet sent to the bank because of bank cutoff hours as an example.  A bank may reflect only the cash deposits made on the morning of the last banking day of the month on the bank statement. Conversely, all afternoon deposits are usually credited in the next month. Normally, a deposit in transit clears in the bank within the following month. Hence, something is extraordinary when deposits in transit are still outstanding for over a month.

1. A deposit was recorded in another bank account.

Recording errors are the most common in deposits in transit. For instance, cash collections were recorded erroneously on another bank account considering that the encoder is just human. Bank account A was debited in the depositor’s record instead of bank account B. The debit to bank account A remains as a deposit in transit and will never clear in bank account A being that the actual deposit was made in Account B. Thus, an adjusting entry might be necessary when there are many errors. The adjusting entry would be a debit to the correct bank account and a credit to another bank account.

  • Debit: Cash in Bank – A
  • Credit: Cash in Bank – B

When too many financial transactions are processed, errors are usually unavoidable in accounting each business day. A bookkeeper will commit mistakes when under pressure. Also, the lack of adequate personnel affects the accounting records reliability owing to each one’s limited time. Hence, by observing and addressing the manpower inside an office errors are reduced.

2. A deposit in the bank did not clear

Sometimes, a deposit did not clear in the bank. In fact, an NSF check will never clear in a bank. The bank usually debits the check amount after crediting the depositor’s account in the bank statement. This needs an adjusting entry by debiting Accounts Receivables and crediting Cash in Bank Account.   Also, an erroneously written check could also be rejected by a bank. Too many errors in the written check will result in an invalid transaction and the bank will not clear the deposit. The adjusting entry is the same as the above. Next, the signature on the check could be faked. The bank can Identify forge signatures which they will refuse immediately. In addition, post-dated checks are valid, although the bank has its discretion to allow the recipient to cash out before the check date. Some banks will wait for the date written on the check before allowing cash-outs. This ensures that there are enough funds from the check sender. However, some banks will attempt to process checks which can result in bank charges due to insufficient funds. The adjustment is the same as the above.

  • Debit: Accounts Receivables
  • Credit: Cash in Bank


3. No deposits of cash collections

An adjusting entry is required when collections are not actually deposited to a bank. In this case, an accountable officer did not adhere to an organization’s policy. This is possible with a weak internal control, for example, no separation of duties and responsibilities. The cashier/collector deposits their own collections to a bank without a review from a supervisor.  In addition, the cash deposit is recorded in the depositor’s record but it never happened. This is easy to identify since it remains as part of the deposits in transit for over a month. Also, deception could have occurred which is usually unexpected. Hence, the adjusting entry is a debit to Due from Officers and Employees Account and credit to Cash in Bank Account to set up receivable from the accountable officer.

  • Debit: Due from Officers and Employees
  • Credit: Cash in Bank

To prevent misdeeds from employees or co-workers, a Daily Collection and Deposit is prepared and signed by the cashier/collector and a liquidating officer. Indeed, it prevents some employees from manipulating the depositor’s record. A set of second eyes increases the reliability of the cash collections and deposits. Also, this enhances the internal control of a business through the separation of duties and responsibilities.

The strengthening of internal control is enhanced through the regular preparation of bank reconciliation statements. Indeed, the report helps identify errors and irregularities. All errors are detected early and improper conduct is avoided. In other words, the report assists in the correction of mistakes and prevention of misconduct of employees.