Bank Charges Journal Entry

Bank Charges Journal Entry does not have any unusual accounting treatment.

It is similar to any other expenditure journal entry.

Bank Charges are expenses to the account holder and income to the Bank. 

Estimated reading time: 7 minutes

What’s the Bank Charges Journal Entry?

In the Books of Account Holder,

All the Fees or Charges by the Bank to its Account Holders are debited to one GL – Bank Charges A/c. However, it’s not a hard and fast rule that all bank charges need to be recorded in only one GL. So, Entities can record this kind of transaction in multiple GLs such as Cash Handling Charges GL, Maintenance Charges GL, Overdraft Fees GL, etc.

The primary reason for recording at multiple GLs is to track the expenses separately.

Does the business need to track the bank charges?

Business entities maintain multiple bank accounts considering the needs of their suppliers, customers, banking benefits, as part of terms and conditions from the borrowing banks, etc.

Considering the higher number of bank accounts, it’s a good practice to understand each of such charges and analyze all of them to check if there are a sudden spikes in those charges in comparison to prior years.

Further, this data helps businesses to make informed decisions such as closing down accounts that offer fewer benefits and high maintenance charges.

Illustration to understand the benefits of tracking bank charges

For instance, Unlucky Enterprises is into trading children’s toys. As part of its banking business, it offers a 45-day free corporate credit card with annual charges of $10,000 and a monthly spending limit of $500,000.

Considering the transaction fees attached to using credit cards, very few of the vendors of Unlucky Enterprises are allowing payments using corporate credit cards.

All such monthly vendor payments are less than or equal to $5,000. It’s a clear case of costs outpowering the benefits. Thus, a periodical analysis of these bank charges helps businesses in reducing such unprofitable expenses.

Read also: Concurrent Audit of Banks Guide

Understanding the Bank Charges Journal Entry in the Books of Account Holder

Cash Handling Charges:

Banks allow certain limits for cash deposits or withdrawals. So, there are no charges if the transactions are within the limit. For example, the Bank mandates charges if the cash deposited in the current account exceeds $300,000 per day. Cash handling charges are applicable if the deposit exceeds $300,000 is $1 per each $3,000 deposit on the same day. Refer below to understand who needs to pay for these charges (Depositor or Customer whose accounts receives these deposits)

Each bank has a different policy for the service charges. So, Cash handling charges are the charges levied by a bank for providing cash deposit services to the account holder.

Why are Cash handling charges levied?

These charges help borrowing institutions recover the costs of administrative, security, and manual efforts. Further, all these increased charges are to encourage online transactions as part of digital transformation growth.

When are these Cash handling Charges levied?

These charges are levied as and when the transaction happens. So, the bank deducts the cash handling charges from the deposit amount and deposits the balance into the customer account.

Runners Insight: Cash handling charges are triggered as and when the limits are exceeded and the fees are deducted from the total of all transactions.

Example:

Wanna see an example that triggers cash handling charges?

Let’s take reference to the bank charges policy from the above example. Assume XYZ is an account holder of ABC Bank.

• Scenario I – The total of deposits is Rs.99,800 on the day. No Charges are levied
• Scenario II -The total of deposits is Rs.100,100 on the day. Charges are levied as and when the limit is triggered.

Assume the total of deposits is Rs100,100 on the day and 11 deposit transactions happened on that day for this XYZ account holder.

The value of the 10-deposit transaction is Rs.99,800. The last transaction value is Rs.300. So, so charges are not levied till 10 transactions. Fees are deducted after the occurrence of the 11th transaction.

Charges are levied on all transactions not just on the 11th transaction which triggered the limit. But on the whole of daily deposits.

Total charges = 100,100*1/1000 = Rs.100.10

In the Books of the Bank,

Here, the Bank Account debited represents the Cash inflow to the Banks for Other Income. Here Other income means the non-primary source of income such as Savings Account Maintenance Fees. Banks’ majority income comes from the interest earned on various types of Loans sanctioned such as Personal Loans, Home loans, Gold Loans, Agriculture Loans, overdrafts, Cash Credit, etc.

Understanding the Bank Charges Journal Entry in the books of Bank

Are you wondering how to record these transactions in the books of customers?

Let’s think of an example where ABC Enterprises receives $100,000 from its customers as a full and final settlement against the sales. Now, how to record this.

Customer receivables shall be recorded as below.

Bank A/c Dr 100,000

Cash Handling Charges A/c Dr 100

To Customer Receivables A/c 100,000

Now that we learned about the accounting treatment of bank charges, we will move on to understand some basics such as what are bank charges, why are they levied, etc.

Bank Charges

Bank Charges are the transactional fees for the various services provided by the bank. It does not include the interest charged on the loans.

What are Bank Charges?

Service Charges levied by Banks for transactions such as Maintenance Fees (E.g., Debit and Credit Card Annual Fees), Transaction Fees (E.g., Cash Handling Charges), Fees for Issuing bank statements, etc. The List is never-ending. Find an example of bank charges here.

Why are the Bank Charges Levied?

Any business can sustain itself based on profits and income in the long run. A major source of income for banks after Interest income is the transaction charges.

All the facilities used by the account holders at the Bank require payment of bank charges or fees.

Note: Banks are also required to charge the GST on the total value of bank charges levied. So, account holders tend to record the bank fees along with all taxes levied.

Runners Insight: The interesting fact about this expense is that there will not be any liability account in this JE. This is because most often the fact that charges are payable is known after the happening of the transaction. Account holders get this information from Bank statements.

Conclusion for Bank Charges Journal Entry:

Bank Charges Journal entry is similar to an expenses JE. We record this entry by debiting the Bank charges GL and Crediting the Bank GL.

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