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.
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:
