A bank service charge journal entry is part of a bank reconciliation process. Businesses usually discover that at the end of an accounting period, the ending cash balance in their books and the ending balance in the bank do not always match. As a result, bank reconciliations are constructed to ensure that the business’s records are correct. This involves comparing the recorded amount in the books with the amount of money shown on the bank statement and making journal entries for any justified differences like bank service charges.
Banks usually deduct bank service charges from their customer’s accounts at different intervals depending on the type of fee. Some banks may deduct a monthly maintenance fee for accounts while some may make the deduction on an annual or per-transaction basis. These bank service charges definitely result in a deduction in the account balance of the customer’s account that is not reflected in the books. Hence, a journal entry for bank service charges is necessary to reconcile the recorded amount in the books with the amounts shown on the bank statement.
In this article, we will discuss the journal entry for bank service charges and how to record bank service charges.
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Bank service charge explained
Businesses and individuals make use of bank accounts for their transactions and in the process have to pay the bank for their services. These bank charges result in an expense for the account holder while being service revenue for the bank. Hence, bank service charges are the expenses automatically deducted from a company’s cash account at the bank in exchange for the service the bank renders during the period. They include service charges levied by banks for transactions such as maintaining an account (e.g., debit and credit card annual fees), issuing checks, processing transactions (e.g., cash handling charges), issuing bank statements, etc.
To the account holder, these bank service charges are expenses but to the bank, they are income. Hence, the accounting treatment for a bank service charges journal entry is similar to any other journal entry for expenditure. Nonetheless, accounting standards may dictate how businesses account for these bank charges. In general, how to record bank service charge is to report it as an expense while decreasing the balance for the specific account in the cash book.
Businesses may choose to have a separate account for each type of bank service charge incurred to help assess the type of expense for further analysis. Businesses, in some cases, may capitalize bank service charges when an accounting standard requires them to include the charges as a part of an asset’s cost. Nevertheless, all bank service charges should appear under financial expenses in the income statement.
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Bank service charge journal entry
In accounting, the process to record bank service charges usually constitutes a part of bank reconciliation. Companies cannot predict bank service charges because the bank adds them to their accounts without notification. Hence, they usually ascertain the actual amount of bank service charge when making the bank reconciliation. They have to wait until they receive their bank statements and reconcile them with the ledgers in order to identify the bank service charges and account for them accordingly.
Therefore, the journal entry for bank service charges is usually not accounted for yet until the company makes the bank reconciliation. A separate account for bank service charge expenses can be used to store all fees charged to the company’s checking accounts by its bank. This bank service charge expense account is more likely to be used when a company maintains a large number of checking accounts, and wants to analyze the costs of maintaining them. However, when a company has fewer checking accounts or the bank service charges are quite low, the charges are more likely to be recorded in a miscellaneous expenses account.
Since the bank service charges are often shown on the bank statement, and not yet on the company’s books, a bank service charge journal entry is needed in the books. According to the accounting debit and credit rules, you debit all expenses and losses and credit all incomes and profits. Therefore, since the bank service charge is an expense, it would be a debit. Also, the rules also state that for real accounts (assets and liabilities), debit what comes in and credit what goes out. This means that since cash (an asset) goes out when bank charges are deducted, it will be a credit.
In conclusion, in order to record bank service charges, the journal entry would be a credit entry to an Asset account (Cash or Bank account) and a debit entry to an Expense account such as Bank Service Charges or Miscellaneous Expenses. That is, the journal entry for bank service charges would increase the expense in the income statement and decrease the cash in the balance sheet. Hence, the bank service charge journal entry is as follows:
|Bank Service Charge Account||00|
As earlier said, if the bank service charge is an insignificant amount, the company may use the miscellaneous expense to record such charges instead. Hence, in such case, the journal entry for bank service charge would be as follows:
|Miscellaneous Expense Account||00|
Read also: Accrued expenses journal entry and examples
Examples of bank service charges journal entry
A bank service charges journal entry would increase the expense in the income statement and decrease the cash in the balance sheet. Let’s look at some examples of how to record bank service charge journal entry in the books:
Bank service charge journal entry example 1
ABC Company maintains a bank account with a local bank. The company receives its bank statement and discovers that it incurred an annual account service charge of $200. Hence, it records it as an expense in the bank service charge account. That is, the bank service charge journal entry to record this is as follows:
|Bank Service Charge Account||$200|
Bank service charges journal entry example 2
In the bank reconciliation, XYZ Company finds out that the bank service charges amounted to $15 which has not been reflected in the book balance yet. Hence, XYZ Company makes a journal entry for bank service charge in the bank reconciliation to adjust the balance in the book. The following journal entry is made:
|Bank Service Charge Account||$15|
Assuming XYZ Company does not have the bank service charge account in the example above. Due to the fact that the recorded bank service charge is too insignificant, the company doesn’t bother to create a bank service charge account in the chart of accounts. This means, in such an instance, the company can use the miscellaneous expense account to record the bank service charge instead. Hence, the journal entry for bank service charge would be as follows:
|Miscellaneous Expense Account||$15|
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