What it means
When a customer pays a supplier by cheque, the supplier deposits it with its own bank. That bank must collect the money from the customer's bank, and the cheque is a transit item during the journey.
Banks use transit items to manage risk. Until the paying bank confirms the cheque is good, the depositor's bank may place a hold on part of the amount, which is why an account can show a higher ledger balance than available balance.
In a business's own books, the idea shows up as a deposit in transit. The company has recorded a receipt and paid the cheque in, but the bank statement does not yet include it, so the two records differ until the cheque clears.
Handling transit items well is part of cash management, and it is a big reason why experienced treasurers watch the bank's availability schedule. A treasurer needs to know which funds are truly available when deciding whether to pay suppliers, repay an overdraft or invest surplus cash.
Electronic clearing, image-based cheque processing and faster payment systems have shortened the transit period in many countries. Even so, international cheques, large amounts and new accounts can still face long holds.
Fraud is the other concern. A cheque can bounce after the money has been spent, so banks and businesses often take extra care with unusually large cheques from unknown payers.
In practice
Real-world examples.
Example
A wholesaler receives a $25,000 cheque from a customer in another region. The bank treats it as a transit item and releases the funds after three working days, so the wholesaler delays a supplier payment until then. The credit controller also notes that the customer has a good record, which is why the hold is shorter than usual.
Example
An accountant preparing a month-end bank reconciliation finds a $4,500 deposit recorded on 30 June that does not appear on the bank statement until 2 July. She lists it as a deposit in transit and does not adjust the books. The following month she ticks it off once it appears on the statement.
Example
A bank branch receives a bundle of cheques from a retail customer at the end of the day. It sends them to the central clearing unit, where each is checked and presented to the paying bank. If a cheque is unpaid, the depositor's account is debited again and the customer is told.
Formula
Calculation
The usual calculation separates money you can spend from money still travelling:
Available balance = Ledger balance - Transit items on hold
An illustrative company has a ledger balance of $85,000 after depositing a $12,000 cheque drawn on another bank. The bank places the whole cheque on hold for two working days, so the available balance is $85,000 - $12,000 = $73,000. If the company writes a $75,000 payment today, it is $75,000 - $73,000 = $2,000 short and risks a returned payment or overdraft fee. Once the cheque clears, the available balance becomes $85,000.Case study
Seen in the real world.
Kestrel Print and Pack is an illustrative, fictional packaging company that relied on cheques from several large customers. In one busy week the finance clerk saw a ledger balance of $140,000 and paid $120,000 to suppliers and the payroll bureau.
Only $60,000 of the balance was available, because $80,000 was made up of cheques still in transit. Several payments were returned, the company paid bank charges, and one supplier put the account on hold. The managing director was surprised, because the accounting system had shown a healthy balance all week.
The finance manager changed the process so that payment runs used the available balance, not the ledger balance. In this illustrative follow-up, the firm also asked its large customers to pay electronically, which removed most of the delay and the risk of returned payments. The clerk now reviews a daily cash position report that splits the balance into available and in-transit amounts.
Watch out
Common mistakes.
- Treating the ledger balance as spendable cash when part of it is still in transit.
- Adjusting the accounting records for a deposit in transit, when it should only appear as a reconciling item.
- Assuming a cleared cheque cannot be reversed, when fraud or errors can still cause a return.
Questions
People also ask.
How long does a transit item take to clear?
It depends on the country, the payment type and the banks involved, from the same day for electronic payments to several days for cheques.
Why does my bank show two balances?
The ledger balance includes everything recorded, while the available balance subtracts holds such as transit items. Always base spending decisions on the available balance.
Is a deposit in transit an error?
No, it is a normal timing difference that disappears when the bank processes the deposit. It only becomes a concern if it stays unreconciled for weeks.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%