How do you record bank service charges in a journal?

Recording Bank Service Charges in the Journal

Bank service charges, like any other expense, impact a company’s financial position. Accurately recording these charges in the accounting records is crucial for maintaining a balanced and reliable picture of the company’s financial health. This article details how to correctly journalize bank service charges.

Bank service charges represent costs incurred for utilizing banking services, such as processing checks, maintaining accounts, or using specific banking features. These charges reduce the available cash balance in the company’s account. To properly reflect this reduction in the accounting records, a debit entry is made to the Bank Service Charges expense account, and a corresponding credit entry is made to the Cash account.

The Journal Entry

The journal entry for bank service charges is straightforward:

Date: [Date of Charge]
Account Debit | Account Credit
------------------------------
Bank Service Charges | Cash
[Amount of Charge] | [Amount of Charge]

Explanation

• Debit Bank Service Charges: This increases the balance of the Bank Service Charges expense account. Expenses increase the debit side of the account.
• Credit Cash: This decreases the balance of the Cash account. Cash decreases on the credit side of the account.

Why is this important?

This precise recording ensures a crucial aspect of financial management: the reconciliation of the bank statement with the company’s internal records. A bank statement often reflects transactions already processed by the company, and this recording ensures that any deductions (like bank service charges) are reflected in the company’s books, leading to a fully aligned picture of funds and transactions.

Example:

If a company incurs a bank service charge of $25 on October 26th, the journal entry would be:

Date: October 26
Account Debit | Account Credit
------------------------------
Bank Service Charges | Cash
$25 | $25

This journal entry, when properly posted to the general ledger, reflects the impact of the bank service charge on the company’s financial position, ensuring accuracy in financial reporting and facilitating the bank reconciliation process. Failure to record these charges can lead to inaccuracies in the financial statements and create difficulties in the reconciliation process.