Deposits in transit

Deposits in transit is a cash receipt added to the company's cash balance but not yet added to the balance reported on the bank statement. When a company received a check, it increases its Cash account. A period of time may pass before the check is deposited by the company and recorded by the bank. At the end of each month the company may have deposits in transit (either cash or checks) that cause its Cash account balance to be greater than the balance on the bank statement.

Deposits in transit made to a bank account that have not been credited to the bank statement. Or a company's receipts that appear on the company's records but do not yet appear on the bank statement. For example, a retail store's receipts of March 31 are deposited after banking hours on March 31 or on the morning of April 1. Those receipts are in the company's general ledger Cash account on March 31, but are not on the March 31 bank statement. As a result, they are said to be "in transit" on March 31. On the bank reconciliation a deposit in transit is an adjustment to the balance per bank.

Difference between balances

The following steps should reveal all the reconciling items that cause the difference between the two balances:

• Deposits in transit Compare the individual deposits listed on the bank statement with deposits in transit from the preceding bank reconciliation and with the deposits per company records or duplicate deposit slips. Deposits recorded by the depositor that have not been recorded by the bank are the deposits in transit. Add these deposits to the balance per bank.
• Outstanding checks Compare the paid checks shown on the bank statement with

1. checks outstanding from the previous bank reconciliation
2. checks issued by the company as recorded in the cash payments journal. Issued checks recorded by the company but that have not yet been paid by the bank outstanding checks. Deduct outstanding checks from the balance per the bank.

• Errors Note any errors discovered in the foregoing steps and list them in the appropriate section of the reconciliation schedule. For example, if the company mistakenly recorded as $169 a paid check correctly written for $196, it would deduct the error of $27 from the balance per books. All errors made by the depositor are reconciling items in determining the adjusted cash balance per books.
• Bank memoranda Trace bank memoranda to the depositor's records. List in the appropriate section of the reconciliation schedule any unrecorded memoranda.

Stolen deposits

A final strategy used to conceal stolen deposits is to carry the missing money as deposits in transit, which are a way of accounting for discrepancies between the company's records and the bank statement:

• it is a normal business practice to transfer the surplus assets at certain location to the location where the resources are scare
• assets are considered to be in transit when they do not belong to any location
• the deposits in transit are required to be accounted for at the end of the reporting period
• the position of the organization as a whole never changes. Since the cash is reduced from one location, branch, department, division and is added in the other location
• now in the era of electronic worlds the time lag between the transfers have been reduced

Examples of Deposits in transit

• A company has collected $50,000 in cash from its customers and has yet to deposit the funds in the bank. This amount is considered a deposit in transit.
• A customer has sent a check for $1,000 to the company, but the check has not yet been deposited into the company's bank account. This amount is considered a deposit in transit.
• A customer has sent a $500 money order to the company, but the company has not yet deposited the money order into the bank. This amount is considered a deposit in transit.

Advantages of Deposits in transit

Deposits in transit provide companies with several advantages, including:

• Improved cash flow as the company does not need to wait for the check to be processed by the bank before the funds are available.
• Increased accuracy of financial reports as the company can record the deposit as soon as it is received rather than waiting for the bank to record it.
• Greater visibility and control of the company’s finances as the company can track the deposits from the moment they are received until they are recorded by the bank.
• Increased efficiency of cash management as the company can better plan for future expenses and investments.

Limitations of Deposits in transit

Deposits in transit have several important limitations that must be considered when reconciling a company’s bank account. These include:

• Timing Risk: Deposits in transit are not recorded on the bank statement until the bank processes the deposit. This can lead to discrepancies in the cash balance if the deposit is not processed in a timely manner.
• Interest Risk: Deposits in transit are not earning any interest until they are recorded on the bank statement. This can lead to a significant difference between the company’s cash balance and the actual amount of money available in the bank account.
• Fraud Risk: Deposits in transit are not subject to the same scrutiny as other transactions, which can open the company up to potential fraud.
• Recordkeeping Risk: Companies must maintain accurate records of all deposits in transit. This can be difficult and time-consuming, especially if the company has multiple bank accounts.
• Liquidity Risk: Deposits in transit can affect a company’s liquidity if the cash is not available when needed.

Other approaches related to Deposits in transit

There are several different approaches to accounting for deposits in transit that can be used to ensure accurate financial statements. The following are some of the approaches to accounting for deposits in transit:

• Accrual Basis Accounting: Under this approach, the deposits in transit are recognized as liabilities on the balance sheet. This is done by recognizing an accrued receivable item which is equal to the deposits in transit amount.
• Adjusted Cash Basis Accounting: Under this approach, the deposits in transit are added to the cash balance on the balance sheet. This is done by adjusting the cash balance by the deposits in transit amount.
• Offsetting Accounts: Under this approach, two accounts are created on the balance sheet to offset each other. One account is used to record the deposits in transit and another account is used to record the amount of the deposits that have not yet been received.

In summary, there are several different approaches to accounting for deposits in transit that can be used to ensure accurate financial statements. These include accrual basis accounting, adjusted cash basis accounting, and offsetting accounts.

Footnotes

Deposits in transit — recommended articles

Reversing entry — Closing entry — Closing the accounts — Opening entries — Income summary — Closing entries — Statutory books — Book of original entry — Control account

References

• Kranacher M., Riley R., Wells J.T., (2010), Forensic Accounting and Fraud Examination, John Wiley & Sons, New Jersey.
• Masoom K., (2013), The Entrepreneur's Dictionary of Business and Financial Terms, Partridge, Singapore.
• Nikolai L.A., Bazley J.D., Jones J.P., (2010), Intermediate Accounting, Cengage Learning, Brazil.
• Weygandt J.J., Kimmel P.D., Kieso D.E., (2010), Financial Accounting, John Wiley & Sons, New York.

Author: Adam Jawor