Direct Credits or Direct Deposits are amounts deposited directly by someone into an account of the company. The payer rather than the payee in this case initiates the deposit. Direct Credits are useful where regular receipts are expected from known parties (such as rent, interest on investment, royalties, etc) who can deposit the money without the involvement of the payee. The deposit may be made through cash, cheque or a fund transfer.
Bank records the amount received as soon as the transfer through direct credit is made but the business entity records the amount when it receives intimation by the bank through bank statement or otherwise. Therefore, the balance as per bank statement may be higher than the balance as per cash book due to direct credits not yet accounted for by the entity. The difference needs to be eliminated by adjusting the cash book of the company before the preparation a bank reconciliation.
Example
ABC & Co. receives rent amounting to $1000 on its leased property via direct credit into its bank account on 30 December 2010. The Company has not recorded the rent received in its books. The balance on the cash book shows a balance of $20,000. Bank statement shows the following:
| Bank Statement of ABC & Co. for the month of December 2010 | |||||
|---|---|---|---|---|---|
|
Date |
Particulars |
Opening Balance |
Debit |
Credit |
Balance |
|
01-12-2010 |
|
20,000 |
- |
- |
20,000 |
|
30-12-2010 |
Fund Transfer |
20,000 |
- |
1,000 |
21,000 |
As the bank credited the account of ABC & Co. as soon as the direct credit was made, the balance as per bank statement is higher than the cash book balance by $1000. ABC & Co. must record the rent received through direct credit in its cash book before preparing the bank reconciliation to remove the difference. Following accounting entry must be recorded to arrive at the corrected cash book balance:
|
Debit |
Bank |
$1,000 |
|
Credit |
Rent Income |
$1,000 |
