What it means
A business records a receipt when it receives the money: when a customer's cheque arrives, when cash is taken at the till, when a card payment is processed. The bank records the same receipt when the money reaches the account: when the cheque is paid in and cleared, when the cash is counted at the branch, when the card processor settles.
Between the two events there is a gap of hours or days, and at any given moment some receipts will have been recorded by the business but not yet by the bank. Those receipts are deposits in transit.
They are real money that belongs to the business; the bank simply has not caught up. The bank reconciliation is where deposits in transit appear.
Its purpose is to prove that the company's cash records and the bank's records agree once the timing differences and errors on each side are accounted for. Starting from the bank statement balance, the reconciliation adds deposits in transit (recorded by the company, not yet by the bank) and deducts outstanding cheques or payments (issued by the company, not yet presented to the bank) to arrive at the balance the bank would show if it had caught up.
Starting from the company's ledger balance, it adjusts for items the bank has processed that the company has not yet recorded, such as bank charges, interest, direct debits and dishonoured cheques, and for the company's own errors. The two adjusted balances must agree.
Identifying deposits in transit is a matter of matching. Each deposit recorded in the company's cash book is traced to the bank statement; those not found are in transit.
The most reliable check is the following period's bank statement: a genuine deposit in transit at 31 December appears on the January statement within a few days. A deposit that does not appear in the following period is not in transit; it is missing, and the reasons range from a deposit slip prepared but never taken to the bank, through a customer's payment recorded twice, to a receipt that was diverted.
Auditors routinely trace deposits in transit at the year end to the subsequent statement for this reason. The fraud risk is specific and well known.
A person who steals cash receipts and has access to the cash records can conceal the theft by recording receipts that were never banked and describing the difference as deposits in transit, which will always be "in transit" because the money is gone. A related technique, lapping, uses later customers' receipts to cover earlier thefts, with the shortfall constantly rolling forward.
The control is segregation of duties, so that the person who handles receipts does not prepare the reconciliation, combined with an independent review that traces every deposit in transit to the next statement and questions any that is more than a few days old. For cash management, deposits in transit represent a float that the business cannot yet use, and their size and duration are worth managing.
Banking receipts daily rather than weekly, using electronic payments in place of cheques, and choosing card processors with fast settlement all shorten the transit time and bring cash into use sooner. A business with $40,000 of receipts permanently in transit is a business with $40,000 less available cash than its ledger suggests, which is worth knowing when the cash position is tight.
In practice
Real-world examples.
Example
A restaurant's Saturday and Sunday takings of $14,000 are recorded on the days taken but credited by the bank on Monday, so they appear as deposits in transit on any statement dated over the weekend.
Example
A card processor settles with a two-day delay, so a retailer's card sales for the last two days of every month are deposits in transit at the month end, typically $60,000.
Example
An auditor finds a $9,000 deposit in transit at the year end that does not appear on the following month's statement, and the investigation finds that the deposit slip was prepared but the cash was never banked.
Think of it
“A deposit in transit is money you've deposited that the bank hasn't recorded yet-in the banking pipeline.
Formula
Calculation
Adjusted bank balance = Bank statement balance + Deposits in transit minus Outstanding cheques and payments (plus or minus Bank errors)
Adjusted ledger balance = Ledger cash balance minus Bank charges and other debits not yet recorded + Interest and other credits not yet recorded (plus or minus Company errors)
The two adjusted balances must be equal
Deposits in transit = Deposits recorded in the cash book minus Deposits credited on the bank statement (for the same period)
Worked example. At 31 December a company's ledger shows a cash balance of $312,000 and its bank statement shows $585,000. The reconciliation identifies: deposits recorded on 30 and 31 December totalling $40,000, credited by the bank on 2 January; cheques written in December totalling $380,000 not yet presented; bank charges of $2,000 on the statement not yet recorded in the ledger; and a customer's cheque for $65,000, recorded as received, returned unpaid by the bank.
- Adjusted bank balance = $585,000 + $40,000 (deposits in transit) minus $380,000 (outstanding cheques) = $245,000
- Adjusted ledger balance = $312,000 minus $2,000 (charges) minus $65,000 (dishonoured cheque) = $245,000
- The balances agree; the company's true cash at 31 December is $245,000, and the ledger is corrected for the two bank items
Tracing. The reconciler checks the January statement and finds the $40,000 credited on 2 January as two deposits of $28,500 and $11,500, matching the cash book entries. The deposits in transit are confirmed genuine.
Cash management. The company banks cheques twice a week. Its average deposits in transit are $40,000; if it banked daily and moved its larger customers to electronic payment, average deposits in transit would fall to about $12,000, making $28,000 more cash usable on a typical day. At a 7% overdraft rate that is worth about $2,000 a year, a small sum, but the faster banking also reduces the risk of cheques being lost or diverted.Case study
Seen in the real world.
A wholesale business employed a bookkeeper who received customer cheques, recorded them, banked them and prepared the monthly bank reconciliation. The reconciliation always balanced, and the owner signed it without reading the detail. Over two years the bookkeeper diverted 23 customer cheques, totalling $62,000, into an account in a similar name, recording each in the cash book as received and banked.
On each reconciliation the missing money appeared as deposits in transit, described as cheques banked on the last days of the month, and because the owner never traced them, the explanation was never tested. When customers' accounts showed the payments as received, the bookkeeper used later receipts to keep the largest balances current, so that the customer statements raised no queries.
The fraud surfaced when the bookkeeper fell ill and a temporary replacement prepared the reconciliation. She noticed that the deposits in transit totalled $62,000 against typical monthly receipts of $400,000, and that the items listed were dated over a period of many months rather than the last two or three days.
Tracing them to the following statements, she found that none had ever been credited. The owner's accountant confirmed the position, the police were involved, and the business recovered a small part of the money from the bookkeeper's assets and a larger part from its fidelity insurance, less an excess.
The controls put in place were the standard ones that had been missing. Cheques were opened and listed by a person who did not record them, and the list was compared with the cash book by a third person. Customers were moved to electronic payment where possible, removing cheques from the process.
The reconciliation was prepared by the bookkeeper but reviewed by the owner, who traced every deposit in transit to the next statement and questioned anything older than three days. The accountant's note to the owner made the point plainly: a deposit in transit is a claim that money is on its way to the bank, and a claim that is never checked is an invitation.
Watch out
Common mistakes.
- Accepting deposits in transit on a reconciliation without tracing them to the following bank statement, which is the only proof that they were real.
- Allowing the person who handles receipts to prepare the reconciliation, so that missing money can be described as in transit indefinitely.
- Treating the bank statement balance as the company's cash position when deposits in transit and outstanding cheques mean the ledger balance, reconciled, is the true figure.
Questions
People also ask.
What is the difference between a deposit in transit and an outstanding cheque?
A deposit in transit is money the company has recorded as received but the bank has not yet credited; it is added to the bank balance in the reconciliation. An outstanding cheque is a payment the company has recorded but the payee has not yet presented; it is deducted from the bank balance.
How long should a deposit stay in transit?
Usually one to three business days, depending on the method of banking. Anything older should be investigated: it may be a lost deposit, a recording error, or a sign of diversion.
Do deposits in transit affect the financial statements?
No. The company's ledger already includes them as cash. They are a reconciling item that explains the difference between the ledger and the bank statement, not an adjustment to the accounts.
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