What Is a Deposit In Transit?

A deposit in transit is money that has been received by a company and sent to the bank, but has yet to be processed and posted to the account by the bank. In financial accounting, these deposits 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 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 finances.

Key Takeaways

  • A deposit in transit is an accounting term that refers to checks or other non-cash payments that a company received, 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 in transit accounts for timing mismatches that may arise from this process.

Understanding Deposits In Transit

A transit item is any check or draft that is issued by an institution other than the bank where it was initially 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 plans. 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, a company may receive a $10,000 deposit in its bank account on December 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. Now suppose the company needs to report its cash balance as of the year end. In this case, 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 the balance until later.