Outstanding deposit is money received from a customer in the form of cash or cheques and recorded in the financial book - on the same day that the money was received - but the deposit has not yet appeared on the company's bank statement. In other words, outstanding deposit is a way to settle money that has been received but not yet processed by the bank .
Outstanding deposit from an accounting perspective
Whenever money has left point A but has not yet reached point B, it means cash in transit. In everyday life, transit cash is:
- physical cash for example when money from cash registers is transferred to a bank.
Most cash transactions take place behind the scenes, such as a check that is in a state of suspension while the bank receives the settlement.
In accounting terms, transit cash is:
- any item on your profit and loss account that has not yet appeared on your bank statement.
For example, if you log in to a customer's payment, but the check is still cleared at the bank or you can check office expenses, but the recipient has not yet done so. Since the cash balance shown in the balance sheet is supposed to reflect all the cash available to the company, a misrepresentation that the bank has not processed would be misleading. Cash Transit is a way of adjusting your cash balance to the bill of checks received or paid but not yet cleared .
Benefits from outstanding deposit
Making sure that all cash and deposits in transit are registered in a separate general ledger avoids many problems because the company always has an accurate record of how much money has been received and how much money is in cleared funds that can be used. After conducting a bank settlement at the end of the year, the company has a clear $10,000 account that will not appear on the bank statement on December 31, because the bank has not booked the cheque before that date, even though the company had a receipt in the cashier's book on the day the deposit was made .
Bank deposit box for customer accounts an outstanding deposit
In the case of using a bank-operated POI system, invoice payments made by customers will be sent directly to a special postal address served by the bank instead of to the company. This means that there are no cheques to pay. The bank collects incoming cheques, processes them and deposits funds directly to the company's bank account. Then it sends the document for transfer to a secure website where the accounting team can access it to update the company's receivables. When using a bank safe-deposit box for customer accounts, there are no payments in transit. This is because the bank updates its records at the same time as or just before the transfer advice is sent. If the accounting team slightly slows down the registration of receivables, you may even experience reverse cash in transit, where the bank updates the data before the company .
Examples of Outstanding deposit
- Customer A Pre-pays for a service: Customer A pays in cash for a service that your business will provide in the near future. The cash is recorded in the financial books as an outstanding deposit, but the money has not yet been received in the company’s bank account.
- Customer B Pays by Check: Customer B pays for a service with a check, but the transaction is not processed until the following week. The check is recorded in the financial books as an outstanding deposit, but the money has not yet been received in the company’s bank account.
- Customer C Pays by Credit Card: Customer C pays for a service with a credit card, but the transaction is not processed until the following week. The credit card charge is recorded in the financial books as an outstanding deposit, but the money has not yet been received in the company’s bank account.
Limitations of Outstanding deposit
- Outstanding deposits lack transparency since they are not reflected in bank statements and other financial documents.
- There is a high risk of fraud and embezzlement if the company is not properly monitoring the outstanding deposit.
- The company’s cash flow may be impacted since the deposit is not available to pay short-term liabilities.
- Outstanding deposits may be difficult to track and it can take a long time to reconcile them with the bank records.
- If the deposit is not recorded correctly, the financial statements may not be accurate and this can lead to a misstatement of the company’s financial position.
Outstanding deposit is a common transaction for many businesses, as it is a deposit made by a customer that has not yet been reflected in the company's bank statement. Other approaches related to outstanding deposits include:
- Accrual accounting: Accrual accounting requires companies to recognize revenue as it is earned, rather than when it is received. This means that when a customer makes a deposit, the company must record the payment as revenue, even if the money has not yet been received.
- Unapplied cash: Companies may use unapplied cash accounts to record deposits that have not yet been processed or cleared by the bank. The unapplied cash account allows companies to track these deposits until they are cleared.
- Contingent liabilities: Companies may also record deposits as contingent liabilities, which represent potential future expenses that may or may not be incurred. This approach is often used when companies are expecting a large deposit from a customer that has not yet been received.
In summary, outstanding deposit is a common transaction for many businesses and there are several approaches that can be used to account for it, such as accrual accounting, unapplied cash, and contingent liabilities.
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Author: Aleksandra Morzywołek