When a bank reconciliation statement is submitted to an accountant or auditor, the report must be reviewed for its reliability. Today, you will learn how to test deposits in transit in just five steps.
What is a deposit in transit?
A deposit in transit is money deposited in a bank, but not yet credited in the bank statement because it is still within the clearing process. This process normally takes place between at least two different banks.
Because the recipient bank does not have access to the sender’s bank account, the transaction must be confirmed by the latter. Without confirmation, the receiving bank can only credit the amount in the bank statement but debits it again if the fund is insufficient.
The steps below can actually improve the speed of testing the reliability of deposits in transit in a bank reconciliation statement.
1. Randomly select deposits in transit from the list of deposits in transits (2% rule)
After receipt of bank reconciliation, it is important to select the sample size. The sample size should at least be two percent of the total amount of deposits in transit. However, if there are few deposits in transits, all are tested because the reconciling items are significant.
The fewer items there are, the more detailed testing one should have because errors are easily discovered. Furthermore, detailed testing uncovers the errors made in the bank reconciliation statement.
For example, if there are only ten deposits in transit, all items should be tested because sometimes there are also errors in fewer reconciling items. Therefore, accountants and auditors must review each reconciling item.
Conversely, if there are several deposits in transit, it is impractical to test each item because it usually takes more time. Hence, the two percent rule can be applied in this testing.
The test must be random so that it includes all material and non-material deposits in transit. Material means the amount is significant in relation to the bank reconciliation statement balance. For example, a $1,000,000 deposit in a $ 20,000,000 adjusted cash in bank balance.
The adjusted cash in bank balance is the actual cash balance an entity has after adjustments of reconciling items.
2. Verify if the deposits in transit were recorded in the depositor’s book.
After the selection of the samples, they must be checked whether they are actually recorded in the depositor’s book. If they are not recorded, the bank reconciliation must also be inaccurate.
This requires further analysis, which can lead to revising the bank reconciliation report. Most of the time, redoing the report takes time and resources.
Why does revising the bank reconciliation statement take time?
Redoing a bank reconciliation report requires more time because everything is reviewed again because of the errors performed. For example, deposits in transit calculation inaccuracies. It is common among new bank reconciliation officers who did not have the required training.
3. Review if all deposits in transit were not actually credited in the bank statement
After the verification of recording, start the validation of deposits in transit with the bank reconciliation statement. The validation of reconciling items becomes easier if a mechanical procedure is followed.
For example, the SUMIF function in excel is used to match book deposits and bank statement credits.
However, for auditors and accounts, the test of deposits in transits is done individually because it is just a review. Thus, every reconciling item must be reviewed and compared to the bank statement.
4. Summarize the erroneous deposits in transit included in the bank reconciliation statement.
Since the test is already over, the findings are summarized in a report so that they can be verified again. It is made to ensure that the tests are accurate. Although it sounds counterproductive, the review and evaluation must be done again for accuracy.
Accuracy in financial accounts is essential to producing reliable financial reports. Thus, if there are errors in a bank reconciliation statement, they must be rectified.
5. Communicate to the bank reconciliation officer the result of the tests
The result of the test of deposits in transit must be incorporated in the overall report and must be communicated to a bank reconciliation officer for comments. The officer can agree with the finding and revise the bank reconciliation report.
Since bank reconciliation is difficult for some officers, revising can be tedious. However, what is important is that the errors are corrected for accuracy.