What Is a Deposit in Transit?
A deposit in transit is money that has been received by a company and recorded in the company's accounting system. The deposit has already been sent to the bank, but it has yet to be processed and posted to the bank account. In financial accounting, these funds are reflected in the company's cash balance on the day the deposit is received, even though it may take the bank several days to process the deposit and post it to the bank balance. The term "deposit in transit" is used to categorize this cash entry and keep track of timing differences that may otherwise cause difficulty in reconciling the company's cash balance on its financial statements to its monthly bank statements.
- A "deposit in transit" is an accounting term that refers to checks or other non-cash payments that a company received and recorded in its accounting system, but which have not yet been cleared by its bank.
- While bank balances will often reflect deposits immediately, funds may not be available for several business days while the clearing process happens.
- Marking these payments as "deposits in transit" accounts for timing differences that may arise from this process.
- Deposits in transit are a major part of bank reconciliations, in which an accountant completes a monthly reconciliation of the cash figure on the company's balance sheet to the bank balance reflected on the bank statement.
Understanding Deposits In Transit
A transit item is any check or draft that is issued by an institution other than the bank where it is to be deposited. Transit items are separated from internal transactions involving checks that were written by a bank's own customers. Transit items are submitted to the drawee's bank through either direct presentation or via a local clearing house.
Most banks will place a hold on a deposited transit check, as allowed by Federal Reserve Regulation CC. Regulation CC allows banks to place a hold of up to nine days on transit items. Most banks will place a hold on a transit item long enough for the item to clear the account on which it's drawn. Because the item is drawn on an account at a different bank from the one where it's been deposited, this can take a few days.
However, many banks make funds from deposited transit items available the next business day after the deposits, or two business days later, as a matter of policy. This is possible because electronic check conversion and other forms of electronic bank draft conversion make it possible to clear transit items faster.
If there are insufficient funds in the account on which it's drawn, the transit item will not clear. When this happens, the funds will not be deposited as planned. In some cases, a bank may agree to cash a transit item before it has cleared, but if it does not clear, the bank will then debit the amount from the depositor's account to cover the discrepancy.
Companies that have their clients send payments directly to their bank do not deal with this timing issue because the company is made aware of deposits when they are posted to their bank account. For companies that collect their own payments, in order to construct accurate financial statements, accountants must often reconcile timing differences caused by factors such as deposits in transit.
Example of Deposit in Transit
For example, assume ABC Company received a $10,000 check from a customer on Dec. 31. The customer is using this check to pay down their outstanding accounts receivable balance in ABC Company's accounting system. When the check is received, ABC Company will record a debit to cash and a credit to accounts receivable. This will decrease the customer's accounts receivable balance and increase its cash and cash equivalent line item on the company's balance sheet. It will also be included in the ending cash figure on ABC Company's statement of cash flows.
ABC Company's accountant then deposits this check into the bank account on the same day, Dec. 31. However, the bank may mark the deposit as "pending" and not increase the account's balance by the $10,000 until it has finished processing it, several days later. Because ABC Company needs to report its cash and accounts receivable balances as of the year end, it is proper to count this $10,000 deposit in transit as being in cash as of the year end, even though the bank did not post it to its balance until later.