If you're picturing a wagon loaded with greenbacks, you'd be right – that's literally cash in transit. Retail stores, casinos and businesses that receive a lot of cash often use armored cars to pick up cash and transport it safely to the bank. For most businesses, though, "cash in transit" means something far more ordinary. It's simply a way of accounting for money that you've received and recorded but hasn't yet been processed by the bank.
Cash in transit is cash and checks you've received and recorded on your income statement, but it hasn't shown up on the bank statement yet due to timing differences.
Whenever money has left point A but has not yet arrived at point B, that's cash in transit. It's easy to picture cash in transit as physical cash, such as when you bag up money from your cash registers and carry it to the bank. In reality, the majority of cash-in-transit transactions happen behind the scenes, such as a check that's in limbo while the bank gets it cleared.
In accounting terms, cash in transit is any item you record on your income statement that hasn't yet shown up on your bank statement. For example, you may have logged a customer payment but the check is still clearing at the bank, or you may have written a check for office expenses, but the recipient hasn't cashed it yet. Since the cash balance reported on the balance sheet is supposed to represent all the cash that's available to your business, it would be misleading to include money that the bank has not yet processed. Cash in transit is a way of adjusting the cash balance to account for checks received or paid that have not yet cleared.
To illustrate cash in transit, imagine that you manage a parking lot that has parking meters. At the end of every day, an employee unlocks the meters and removes all the cash inside. The cash goes to the accounts team who count and record the money in the income statement, after which they bag it up and load it onto a vehicle. The vehicle drives the cash to the bank, where the money gets deposited in the business bank account. During the half-hour journey, the money is cash in transit.
What happens next is the bank will process the deposit overnight. So, any deposits made by the business will not appear on the bank statement until the next business day. When you're reconciling your bank statements, your cash receipt and bank deposit are not going to have the same transaction date. Your cash was in transit for a lot longer than the 30-minute road trip – it was in transit from the time you logged it on your accounts to the time it appeared on your bank statement.
A deposit in transit is a variation on the same theme. It describes money you've received from customers in the form of cash or checks and have recorded on the financial ledger – which you should do the same day you receive the money – but the deposit has not yet appeared on the company's bank statement. Here's an example: Suppose you receive a check for $10,000 from a customer on December 30. You record the check in your accounts book and deposit it in the bank the same day. However, the check takes a few days to process. It does not appear on your bank statement until January 2. Until the check is credited, you do not have the use of the money. It's this timing difference that creates a deposit in transit.
Most times, it doesn't matter if the bank takes a day or two to process your deposit. If you deposit the cash or check on June 5, say, or September 22, the deposit will appear on your bank statement in plenty of time to be reconciled at the end of the month. But what if the time delay tips you into a new accounting period? Now, you have a bit of a conundrum: if you record the invoice as paid in December, then your December bank statement will not reconcile, but if you record it in January, then your December reporting will not reflect the invoice payment, and the accounts will understate your accounts receivable balance. What to do?
In accounting practice, these problems are resolved by using a "cash in transit" or "deposit in transit" account entry. This is simple, as all you're doing is creating a holding account, like a "fake" bank account, where you'll record all your money that's traveling between two locations. You can call this account anything you like, such as "money in transit" or "check to clear."
Now when you receive the customer's $10,000 check, you would credit an account receivable on December 30 in the usual way, then debit the cash in transit account for the same $10,000 amount. When the check clears, you record a transfer from cash in transit to your bank account. This will zero out the cash-in-transit transaction.
Nothing causes more headaches than an out-of-balance bank reconciliation, especially if it isn't immediately obvious what's gone wrong. Making sure that all cash and deposits in transit have been recorded in a separate ledger can avoid a lot of problems since you'll always have an accurate record of how much money you received versus how much money you have in cleared funds that you can use. Now when you run the year-end bank reconciliation, you'll have a clear account of the $10,000 that will not appear in the bank statement on December 31 because the bank had not accounted for the check by that date, even though the business had recorded the receipt in its cash book on the date of deposit.
If you use a bank-operated lockbox system, then invoice payments made by customers will go directly to a special mailing address maintained by the bank instead of going to the business. What this means is, there are no checks to deposit. The bank retrieves the incoming checks, processes them and deposits the funds directly into the business's bank account. It then posts a remittance document to a secure website which the accounting team can access to update the company's accounts receivable.
When you use a lockbox, there is no payment in transit. That's because the bank updates its records at the same time as, or just before, sending your remittance advice. If your accounting team are a little slow in recording the account receivable, there could even be reverse cash in transit, where the bank updates the records before the company does.