Today, you’ll learn what deposits in transit mean in business.
Sometimes, deposit in transit means to business can be revenue losses or delayed cash inflows. For instance, late deposits are cash that is not yet available for disbursements. Its meaning is further discussed in this post to show its probable effects on business operations.
It is known that deposits in transit affect how top management plans the ensuing months’ financial activities. For example, they can cut spending on business operations because there were significant amounts of deposits in transit, as reported in the bank reconciliation statement. Also, they can increase spending when there are few deposits in transit. So deposits that are outstanding may affect management’s actions in the coming months.
But what causes the spending cut?
The spending is usually reduced when actual cash is limited. To explain, a cash balance with too many deposits in transit means money is still coming to the bank account. In addition, the cash balance is not available for disbursements for business operations. Hence, the actual balance of cash must be verified.
Deposits in transit are cash collections deposited in the bank, yet they have not been cleared in the bank. They are already reported as collections of receivables or revenue for the period without cash back-ups. It means the management cannot spend them because it does not exist yet.
In addition, deposits in transits may never be credited in the bank because sometimes the sending bank account is insufficient. This can cause losses to an entity if it is not subsequently collected.
Hence, deposits in transits must be tracked every week or every month. This can help identify uncleared deposits made.
The meaning of deposits in transit in business are:
1. Revenue loss, if not cleared in the bank for over two to three weeks
The operating losses can become significant if there are huge amounts of uncleared deposits in transit. Therefore, businesses need to track uncleared deposits every month.
If monitoring is not regularly made, it can cause erroneous cash balance reported in the financial statements — Balance Sheet and income statement.
The balance sheet is overstated when the cash has not cleared in the bank and the income statement is also overstated because of no cash backup.
To mitigate this problem, each bank account should have its own bank reconciliation for monitoring. This ensures that the cash balance in the depositor’s bank accounts actually exists.
Not all deposits in transit mean revenue losses. It is usually normal to have them every month. However, if they have not been credited to the bank for more than a month, there might be some problems that need to be addressed.
These pressing problems can hurt a business if the problems are not given adequate attention or resolved immediately while still small.
In short, in businesses, monitoring deposits in transit, maybe it can affect the cash balance reported in the financial statement.
2. Delayed cash inflow to an entity or business
Deposits in transit are simply delayed cash flows to the entity, which can normally be credited to banks within three to five days. However, sometimes, the clearing can take more than a month.
This is not good for an entity because the cash inflow is dangerously delayed. It is dangerous since the entity cannot spend the cash balance in the book on its business operations.
Thus, its operation is affected daily because since it does not have enough cash to support its business activities.
If they issue checks believing the cash balance, they can incur NSF checks, which could increase further losses.
Delayed cash inflows can affect the actual revenue of an entity. The identification of uncleared deposits usually assists an entity with the customer selection process.
For example, uncleared payments from customers reveal the customers’ financial capacity. Thus, a company may focus more on big customers.
This is not meant to exclude smaller companies from the priority list, but it can help reduce business transactions to bad customers.
However, for some thriving companies, selection of customers is not just possible, but they must continue monitoring deposits in transit.
3. Incorrect balance in the balance sheet and income statement of an entity
The cash balance in the balance sheet is incorrect if there are significant overdue deposits in transits.
Overdue means deposits in transits have not been credited in the bank for over a month. If the total amount is material, then the cash balance in the financial statements looks unreliable.
This post is not intended to startle anyone about the dangers of uncleared deposits in transit. Its main purpose is to educate business owners who do not know what it means.
Deposits in transit normally exist each month and there is nothing to worry about.
However, if most of them do not clear in the bank within a reasonable period, then it can be an internal control or customer problem.