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If you have ever balanced a checkbook before, you already understand the basic idea behind a deposit in transit, also sometimes referred to as income in transit or simply an uncleared deposit. If you deposit a check in your account, you can record your transaction in your ledger, but the check may take several days to clear. In accounting, a deposit in transit is very similar. It refers to the lag time that it takes for the item to clear and be reflected in the bank ledger, even though the transaction has already been noted in the business’s books.
How to Record a Deposit in Transit
Normally, deposits in transit are immediately recorded in the cash balance. Accountants and bookkeepers must be aware of this issue when preparing balance sheets. Because companies tend to make so many cash deposits, it is common for deposits made toward the very end of the bank account cycle not to be reflected in the bank statement. For example, let us imagine that a company deposits a $2,000 check in its bank account on December 31, and the CFO is preparing the year-end financial statement. She must include the $2,000 as a cash deposit on the balance sheet, but will only include it in the next bank reconciliation, after the transaction has cleared.
Bank Reconciliations
The bank reconciliation, however, is only done when the deposit has been processed. Bank reconciliation is when a company balances its corporate “checkbook,” meaning the company accounts for differences in the cash balance (the “book side”) and the bank statement (the “bank side”). Suppose in the above example, the bank releases the deposit on January 4. Only then would the $2,000 deposit in transit be correctly recorded in the cash account. There are other reasons that there may be a mismatch between the company’s bank statement and cash account. For example, just as when you write a check, it will not be reflected in the bank’s records until the check check clears, outstanding checks would not be reflected in the bank statement, but must be eventually reconciled. Another example would be bank fees. Likewise, any errors in journalized entries must also be included.
What Transactions Can Be Considered in Transit?
Strictly speaking, only cash, checks, or pending electronic transfers should be counted as being in transit. Opinions differ on whether other items, such as pending wire transfers, should be included because the company has not yet deposited them. For the same reason, checks that have not physically been received by the bank for deposit, because they are in the mail for instance, should not be counted as in transit.
Accounting for deposits in transit is an essential part of preparing financial statements and performing the bank reconciliation process. It is important to be careful with these items as they tend to cause confusion. Accountants must check for these deposits and include them in the bank ledger once they have posted in order to proper reconcile the account. In addition, they should be include in any financial statements.