Can an incoming wire transfer be considered a deposit in transit?

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Accounting For Wire Transfers As Deposits In-Transit

A customer initiated a wire transfer on 12/30/11 but it did not post to our bank account until 1/03/12 (first banking day of 2012). Could this be considered constructive receipt and therefore included in 12/31 cash balance as a deposit in transit? Also have checks received Sat. 12/31 to be included as a DIT, but uncertain about incoming wire transfer. Any feedback or reference points for cash in transit accounting treatment would be appreciated. Thanks.

Editor's Discussion Summary:
  • Interestingly, opinions vary
  • Some say the funds have to be in the recipients account
  • Others say simply leaving the sender's account is enough
  • There are many reasons bank wires may be delayed
  • Document whatever you do
  • Usually, wires leave and arrive in the same day
  • How material is the result?
  • An order for a wire is not the same as receiving wired funds
  • Plus much more below!

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Answers

Proformative Advisor
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In my opinion, you will treat the wire transits it the same way as the checks that you have in hand, for which the funds have not been credited in your bank account as of 12/31. The only thing you will need to ensure is that you have necessary back-ups to support why you have included these amounts in the deposits in transit (DIT) account, i.e. copy of the wire transfer sent by the customer dated on or before 12/31.

By following the above accounting, the accounts receivable balance for your customer in your books and the accounts payable balance in your customers books will also tie, just in case the auditors were to request for a balance confirmation certificate.

Additionally, I will recommend you keeping a working paper that details out all of the DIT with an additional column showing when these amounts were actually cleared through the bank statements. Also attach the copy of the bank statement to reduce the auditor review time.

I am a strong believer of maintaining properly referenced working papers, it helps getting a faster auditor approval so you do not have to spend long sleepless nights in your office. Feel free to call me and I can provide you with more tips to get a faster auditor sign-off. :)

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Although it is logical to treat incoming wire transfers as deposits in transit because the payor has released the funds, the recipient does not have use of or the opportunity to use the funds until they are received at the bank. Following the same logic, checks in the mail from the payor would be recorded as deposits in transit provided that they were post-marked prior to the balance sheet date.

Deposits in transit should be those items actually deposited in the bank on the balance sheet date or released for deposit on the balance sheet date, but were not posted by the bank until the first business day following the balance sheet date. This would not include wire transfers in transit since the recipient has no control over the release of the funds for deposit. The control over the funds is in the wire system.

Proformative Advisor
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I agree 100% with this answer. Since funds are not availble as of 12/31/11 the wire should be considered as being in transit at year end.

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The payer initiation or a ware was presumably not posted because it was ordered after the wore window closed. It should note be "posted" to either the sender or the recipient until made...the next year. I would reflect the deposit when received, as wires are designed to be "same day" transaction for both parties. If the transaction is an international wire, the answer may differ.

Proformative Advisor
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Thanks for your comments -

@Phil - So how do you propose to show the amount transferred in the financial statements? Do nothing and only act when you receive the funds in the bank. Also will your conclusion change if the customer faxes/ emails you the scanned copy of the bank transfer to you indicating that money was transferred to your account on 12/31. How is this situation different than your accountant depositing the cheque dated 12/31 in the Bank?

@Barrett - I will agree that usually the bank transfer should be a same day event. However, what if the customer and the person receiving the funds do not bank with the same bank, that can possibly delay the crediting of the funds to the next working day. In this situation, the money would have already left the customer's bank, but not yet credited in your bank account.

So the question still remains that even if the client faxes you the bank transfer advice dated 12/31 will you just ignore it and not adjust your books at all?

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Hello all-This is a deposit in transit. This is clear to me. If you did not have it in your bank account at midnight of 12/31/11, then it is a deposit in transit if was supposed to be received on 12/31/11 but was not.

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@Sunil - As you suggest in your inquiry to my answer, I would account for the wire transfer when it is received. Presumably, the payment is against an account receivable. At 12/31/11 the account receivable would remain unchanged and the cash would not be recorded by the recipient.

My answer would not change if the customer faxes or emails a scanned copy of the transfer order given to his bank. That is the same as a customer faxing or emailing a copy of a check written on December 31, 2011 with the note "your check is in the mail".

An order for a wire transfer given to a sending bank does not necessarily mean that the order was completed on the same day, and does not place the funds in the control of the recipient or its bank. A check deposited in the bank creates an actual claim/demand on the customer's account and is in control of the recipient.

A wire transfer simply moves the funds from the customer's account into the wire system. I have experienced delays of three to five days between the transfer order and the receipt of funds in international wire transfers, and delays of one or more days in domestic transfers either due to the wire system bottlenecks or the transfer across time zones.

I believe the issue is whether the recipient has control of the funds or the ability to make a demand on the customer's bank account at the balance sheet date. A wire transfer cannot be controlled by the recipient and the related funds are not available in the recipient's bank account. A check that is deposited, but not recorded on the same day, in the recipient's bank account is controlled by the recipient and represents available funds and a demand on the customer's bank account. The wire transfer would not be a deposit in transit. The deposited, but not recorded, check would be a deposit in transit.

Proformative Advisor
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@Phil.....thanks for your comments. On this issue I will agree to disagree with you and agree with the auditors of the company.

In my discussions with the auditors, I will bring about the following points to the table:
a) How material is the amount?
b) Will it misleading to disclose the amount one way or the other (i.e. with in deposits in transit OR overstating the accounts receivable balance, if the wire transfer is not recorded as a deposit in 12/31)

Phil, I have seen delays in the wire transfers being credited to the bank account - so I totally agree with you on this part. On the other hand, I have also seen the checks taking quite some time to clear through the banks, considering it is an outstation check OR foreign currency check. Also as finance controller of an organization, are you willing to accept checks from overseas clients OR wire transfers as there can be substantial delays in the clearing of the checks drawn in any foreign currency.

Another point I would prefer a wire transfer over checks is that I have seen checks bounce due to variety of reasons (insufficient funds, etc.), however, I have never experienced a situation in which I have not received the monies through the wire system.

Proformative Advisor
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I have had wires not making it to their destination for days from several reasons, the most absurd was the beneficiary name was missing an "Inc." or some other nonsense.

This was a US wire to a UK bank.

In these days the interpretation of what is "proper" with wire instructions is all over the place.

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If we are talking about accrual accounting, I would recognize the wire as income-in transit. When the wire is received it would satisfy the accounts receivable. I would support the receipt with a bank statement and list of all DITs.

Proformative Advisor
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In my humble opinion, no wire receipt (in bank), no deposit. Wires are not physical checks and one would not record a payment promised as a check in hand, why for a wire.

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I agree with Wayne, having been on the sending end of international wires that never made it to their destination despite bank traces saying they did. DIT is properly composed of cash and checks that are in hand at period end but not yet deposited (or credited, as in night deposits) in the bank.

Proformative Advisor
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@Wayne......thanks for your comments. I have also seen cashier check's being returned by bank as they were missing the words "Inc." on them. So since that day I have ensured to doubly checked the name of the beneficiary.

@Ken.....I guess we are missing a point here in this discussion. Even if we are preparing balance sheet as of 12/31, we will not be finalizing the financials just in one day. There will be a time lag of at least 5 - 30 days before the financials are finalized and reviewed by the auditors, depending on the size of the company. So this gives sufficient time to the company to check the credit in the Bank account for any types of deposits, be it a wire transfer or a check. For example, as long my books are open, I will adjust my books for any checks that have been returned by the bank for whatever reason (insufficient funds, misspelled name, etc.).

For the wire transfer, then it becomes a judgement call - if I have a scanned copy of the wire transfer dated 12/31 from the client and I am able to see the monies in my bank account before my accounts are finalized I might have an option to record it in the Deposits In Transit (DIT).

Proformative Advisor
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Talking about Certified Checks, I've seen them bounce, but that's another discussion...

I'm a purist when it comes to payments. A) if it's a check (at least for the books) it's always good until proven otherwise (reality is different). B) Cash is king, and if I have the green, it's recorded - even if it becomes DIT. ACH/Wires - when I see in the bank. Credit cards, if I have a receipt (better if it appears on my account, it's an expense. Debit cards are similar to wires, in that it can take weeks to appear... But, that's outgoing money, so I book it and keep it as an outstanding item (CIT).

Proformative Advisor
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It has to be received prior to your period end to be recognized in the period. Make sure your bank didn't have it and didn't route to your account. We have had situations where checks were received at the bank the morning of December 31, but get posted to our account on January 1. The bank should be able to confirm the real date received.