On a bank reconciliation statement, how are deposits in transit treated?

Introduction / Context:
Bank reconciliation is a key internal control procedure that explains the differences between a company cash book balance and the balance shown on the bank statement. One common reconciling item is deposits in transit. Examination questions often ask how these deposits are treated in a bank reconciliation, because understanding them is essential for correctly adjusting the bank balance to match the company records.

Given Data / Assumptions:

• The company receives cash or cheques and records deposits in its cash book when they are sent to the bank.
• The bank statement may not show these deposits yet if they were made near the end of the reporting period.
• Deposits in transit are genuine deposits that will appear on the bank statement later.
• The reconciliation starts from either the bank balance or the book balance and adjusts for timing differences.

Concept / Approach:
A deposit in transit is an amount that the company has already recorded as a deposit in its cash book, but which the bank has not yet processed and credited to the bank account. As a result, the cash book balance is higher than the balance shown on the bank statement by the amount of these deposits. When reconciling, the accountant adjusts the bank statement balance by adding deposits in transit so that the adjusted bank balance will agree with the book balance after all reconciling items are considered.

Step-by-Step Solution:
Step 1: Identify deposits that the company recorded in the cash book before the reporting date but that do not yet appear as credits on the bank statement. Step 2: Confirm that these items are timing differences, not errors, by checking deposit slips and bank processing dates. Step 3: Start the reconciliation with the bank statement balance. Step 4: Add the total amount of deposits in transit to the bank balance because the bank has not yet recognised these deposits. Step 5: After also adjusting for outstanding cheques and other reconciling items, compare the adjusted bank balance with the book balance to ensure they agree.

Verification / Alternative check:
Suppose a company cash book shows a balance of 100,000 units of currency at month end. The bank statement shows only 90,000. Investigation reveals that a deposit of 10,000 was made late in the afternoon on the last day of the month and is recorded in the cash book but appears on the bank statement one day later. This 10,000 is a deposit in transit. To reconcile, the accountant starts with the bank balance of 90,000 and adds the 10,000 deposit in transit, reaching an adjusted bank balance of 100,000, which matches the cash book. This confirms that deposits in transit are added to the bank balance in the reconciliation.

Why Other Options Are Wrong:
Option A is wrong because deposits in transit are already recorded in the books; the adjustment needs to be made to the bank balance, not the book balance. Option C is incorrect because deposits in transit are normally collected; they are simply delayed in processing. Option D is wrong because ignoring deposits in transit would leave the bank balance unreconciled. Option E is incorrect because deposits in transit are items not yet recorded by the bank, so they cannot be deducted from a bank balance that does not include them.

Common Pitfalls:
A common pitfall is confusing deposits in transit with bank errors or unrecorded deposits in the company books. Another mistake is adjusting the wrong side of the reconciliation, such as adding deposits in transit to the book balance instead of the bank balance. Some learners also forget that deposits in transit are timing differences that will resolve automatically in the next period when the bank processes the deposits. Understanding the direction of the difference and the principle of reconciling external and internal records helps avoid these errors in both exams and practice.

Final Answer:
They are added to the bank balance because the company has recorded them but the bank has not yet credited them.