4 Ways Deposits in Transit Affect a Bank Reconciliation

Want to learn how deposits in transit affect a bank reconciliation? Read on…

Deposits in transit can affect the bank reconciliation in four ways. First, it increases the unadjusted bank balance. Second, it might overstate the adjusted bank balance. Third, incorrect deposits in transit balance make the bank reconciliation unbalanced. Fourth, Too large Deposits in Transit mean cash might not be available at month-end.

A liquidating officer (Supervisor) consolidates all cash collections from all cashiers and prepares the Report of Daily Collections and Deposit (RDCD). First of all, the final RDCDs of a month usually include collections and deposits on the last business day. The collections are summarized according to each bank account. Collections are sent to a bank in batches, and deposit slips serve as supporting documents. Also, a few deposit slips would be validated only by the bank on the next business day. Some banks set cutoff hours for cash deposits, for example, at Noon, Mondays to Fridays. All cash receipts after Noon could be credited only to the depositor’s account on the next banking day. If cash collections are deposited on the last day of the month, some could remain outstanding. Thus, deposits in transit are normally part of the bank reconciliation statement.

An RDCD is sent to Accounting Office for recording. First of all, the accounting will register the collections and deposits in the cash book and recognize any shortages in the Account Receivables account. Next, all cash deposits are debited to the Cash in Bank Account. So, regardless of when the bank validated the cash deposits, the accounting has already recorded the financial transactions.

However, delays in the submission of RDCDs to accounting might constitute weak internal control. For instance, cash collections may have not been deposited to the bank within a reasonable time. An RDCD is an internal control tool created to ensure that all cash receipts are accounted for.

Four ways deposits in transit affect a bank reconciliation are discussed below in detail:

1. Increases the unadjusted bank balance to calculate the final balance of Cash in Bank account

The items that are added to the unadjusted bank balance of a bank reconciliation are deposits in transit. For instance,  deposits in transit will be credited soon to the bank account since they are already sent to a bank. Also, we are talking about an adjusted method of bank reconciliation. In addition, deposits in transit are considered cash unless they are reversed due to NSF checks. Thus, the final cash available for business operation is calculated by adding deposits in transit.

The formula for deposits in transit is equal to:

 Prior months’ accumulated deposits in transit  +(plus)  the current month’s cash/check deposits  -(minus) cleared deposits = Deposits in transit (Current month)

Notice that the current month’s cash/check deposits are added to the prior month’s outstanding deposits. So, the final cash balance in a bank reconciliation statement increases as the Deposits in transit rise.

2. Might overstate the adjusted bank balance

The adjusted bank balance of a bank reconciliation statement could be overstated by deposits in transit (DIT). For example, a cash deposit erroneously recorded in another bank account increases deposits in transit balance. A deposit in Bank A that was recorded in Bank B by accounting increases the deposits in transit balance of Bank A. This error could be cured upon the preparation of an adjusting entry, debiting Bank account A, and crediting Bank account B. Also, NSF checks included in DIT increase the balance without incoming real cash. The bank will usually debit the depositor’s account if the check is insufficient. In addition, delayed deposits increase the adjusted bank balance. Hence, reviewing deposits in transits helps avoid overstatement of the adjusted bank balance.

3. Incorrect deposits in transit balance makes the bank reconciliation unbalanced

One incorrect transaction in deposits in transit could make the bank reconciliation unbalanced. For instance, a prior DIT did not clear in the current month but was not included in the list. The adjusted book and adjusted bank balance are not equal, in this case. Also, a deposit recorded in the accounting records must be reflected in the bank balance unless it was actually undeposited.

The SUMIF function of Excel could assist in the calculation of deposits in transit. First of all, get all recorded deposits within the month and prior month’s DIT. Next, secure an electronic bank statement or encode it. Now, be sure that the recorded deposits have deposit batch numbers. Those are also used as references in the bank statement. Indeed, reconciliation becomes simple when the lookup values are included in the accounting record and bank statement.

4. Too large Deposits in Transit mean cash might not be available at month-end

Limited cash is available when the total deposits in transit are over 40% of the adjusted Cash in Book/Bank balance. Indeed, it means that disbursements can only be made up to 60% of the Cash in Bank Balance. Deposits in transits are considered cash, however, they are still outstanding and may never clear. Thus, monitoring DIT also prevents the issuance of NSF checks. Also, the management can plan the next month’s expenditures based on the available fund.

Read also: The deposit in transit journal entry