(1) A deposit in transit on the bank reconciliation refers to the cash and checks that have been received by a company as of the ending date of the bank statement, but the cash and checks were not deposited in time for them to appear on the bank statement.
To illustrate deposits in transit, let's assume that your company's accounting period ends on the last day of each month and that your bank statement also ends (or "cuts off") on the last day of each month. When you receive the bank statement ending on January 31, it is likely that its balance will not agree with the January 31 balance in your company's general ledger. One reason for the difference could be that the cash and checks received from customers on January 31 were deposited at the bank too late in the day. (After a specified time on January 31, the bank will record the deposits as of the next business day causing them to appear on the February bank statement.) Another example of a deposit in transit involves a retailer that is open until 9 p.m. on January 31 and deposits the receipts on the morning of February 1. The transactions right up to closing time on January 31 are properly recorded in the company's general ledger as of January 31. However, the deposit will appear on the February bank statement. Since the money from January 31 is indeed part of the company's cash and sales on January 31, the company's general ledger is correct, but the bank statement balance will need to be increased as part of the bank reconciliation process.
(Items that are subtracted from the balance per bank include outstanding checks, and bank errors that when corrected will reduce the bank balance.)
(2) Bank errors involve amounts that were recorded incorrectly by the bank. For example, if a company wrote a check for $89 but the bank coded the check as $98, the bank statement balance will be too low. (The bank deducted $9 too much from the account, and therefore, the bank owes the customer $9.) When the bank makes the correction, the bank balance will increase by $9.00. This adjustment should appear on the bank reconciliation as an addition to the balance per bank.
If a company deposits $97 and the bank records the deposit as $79, the bank added $18 too little into the account...the bank owes the company $18. When the bank makes the correction, the bank statement balance will increase by $18. The company's general ledger has the correct amount recorded, but the bank has the incorrect balance on the bank statement. Hence the balance per bank needs to be increased by $18.
Tip: For determining whether a bank error will be an addition or a deduction on the bank reconciliation, be sure to think in terms of the change in the balance of the bank account. Both of the bank errors described above caused the bank balance to be too low. The correction of each of these errors will result in an increase to the balance per bank.
Learn Accounting: Gain unlimited access to our seminar videos, flashcards, visual tutorials, exams, business forms, and more when you upgrade to PRO.