Normally, a deposit in transit is not recorded in an accounting record. However, if it does not clear in the bank, it is normally deducted from cash in the bank account and from the revenue account or added to a receivable account. The real question is when we must record it.
The preparation of a bank reconciliation statement usually starts with the reconciliation of cash deposits. This starts with matching cash deposit items in the depositor’s record to the bank statement credits. Then, bank credits are matched with book debits.
All unmatched items are listed in the bank reconciliation statement as reconciling items. Then, the cash deposits (book items) are added to the beginning balance of the depositor’s record and all bank credits are also added to the beginning bank statement balance. These additions are made to check if the bank reconciliation statement is balanced after the reconciliation of cash deposits.
The reconciling items include deposits in transit since there are still uncleared deposits at the bank reconciliation date. These cash deposits may not be credited to the bank statement because of the following reasons:
1. Deposit in transit has not cleared in the bank
The clearing of check deposits often extends to the ensuing month because the receiving bank does not have access to the sender’s bank account. This is referred to as checks in transit.
In-transit checks from customers usually clear within three days for local check deposits and within ten days for international. If a check does not clear, bookkeepers can record it by crediting a Cash in Bank account and debiting a receivable or a revenue account.
The deposit in transit journal entry reduces the cash balance and revenue while it increases the receivable balance.
- Debit: Receivable/Revenue
- Credit: Cash in Bank
Why is it important to record an uncleared deposit in transit?
It is important because it overstates the cash balance and understates either the receivable or revenue account. The overstatements can affect the reliability of the balance sheet and income statement.
In both reports, the cash balance and revenue balance are inflated unless a journal entry is made. This is one of the reasons a bank reconciliation is required before issuing a financial report.
Financial reports must be substantiated before their release to the end-users. The users expect a reliable and error-free report. These expectations must be met by the bookkeeper, accountant, and management.
2. Erroneous recording of deposits to another bank account
Sometimes a deposit in transit never clears in the bank because it was recorded in another bank account inadvertently. This error is rectified through an adjusting journal entry.
- Debit: Cash in Bank (Proper bank account)
- Credit: Cash in Bank (improper bank account)
This journal entry removes the reconciling items from the bank reconciliation statements of both bank accounts. Hence, both bank accounts are also corrected and show that one error can affect other bank accounts.
Since an error affects other accounts, it is important to avert errors before they become significant. This can be prevented with the help of a bank reconciliation tool.
This tool is absolutely required in financial accounting because the cash account is one of the essential items on the balance sheet.
3. Undeposited cash collections
When a Daily Cash Receipts and Deposits report is handed to the bookkeeper, the bookkeeper immediately records the transactions in the Cash Book and Cash in Bank account. However, on the last business day of the month, some cash collections are not really deposited because the bank has already closed.
These undeposited collections become part of the reconciling items in the Bank Reconciliation. The reconciling items are usually credited in the bank statement in the first week of the month.
However, if the deposits have not reached the bank within the prescribed period set by management, it can be the fault of an accountable officer. The money may have been lost or used for some other purpose.
If the purpose is not justified, the accountable officer must return the undeposited collections.
The journal entry to set up the obligation to the company is a debit to receivable account and credit to Cash in Bank account.
- Debit: Due From Officers and Employees (Receivable)
- Credit: Cash in Bank
The increase in the receivable account also reduces the cash in the bank balance.
4. Do deposits in transit require an adjusting entry?
As stated above, a journal entry is not usually made for deposits in transit because they are normally credited in the ensuing month’s bank statement.