Companies and individuals use bank accounts to facilitate their transactions. These accounts also come with the safety of their money and other benefits. However, these parties must also pay the bank for their services. The payments constitute an expense for the account holder while being an income for the bank. In most cases, these fees fall under bank services charges.
What is a Bank Service Charge?
A bank service charge is a fee that a bank charges its customers for the various services rendered. These services may include maintaining an account, processing transactions, issuing checks, etc. Usually, bank services charges cover the bank’s costs for providing these services and generating revenue. However, it may not be the primary income source for banks.
Banks deduct bank services from their customer’s accounts. Depending on the type of fee, the charge may occur at different intervals. For example, some banks deduct a monthly maintenance fee for accounts. On the other hand, some may be an annual or per-transaction basis. For customers, these service charges represent a deduction in the account balance.
What is the accounting for a Bank Service Charge?
Several factors determine the accounting treatment of bank service charges. The most crucial of these is the type of charge on the accounting. However, accounting standards may also dictate how companies account for these charges. Generally, this process involves recording an expense while decreasing the balance for the specific account in the cash book.
Companies may maintain a separate account for each type of bank service charge incurred. This division may help assess the type of expense for further analysis. However, all bank service charges appear under financial expenses in the income statement. In some cases, companies may also capitalize bank service charges. It occurs when accounting standards require companies to include these charges as a part of an asset’s cost.
What is the journal entry for a Bank Service Charge?
As stated above, the accounting treatment for a bank service charge may differ based on the underlying circumstances. In most cases, these charges are minimal expenses, often falling under financial expenses in the income statements. For these expenses, the journal entry is as follows.
| Dr | Financial expense |
| Cr | Bank account |
If accounting standards require capitalizing the expense, the journal entry will vary. In this case, the bank service does not become a financial expense. Instead, it becomes part of the underlying asset’s cost. The journal entry to record it, in that case, will be as follows.
| Dr | Asset |
| Cr | Bank account |
Example
A company, Red Co., maintains a bank account with a local bank. The company incurred an annual account service charge of $100. As per the relevant accounting standards, this charge does not become a part of an asset’s cost. Therefore, Red Co. records it as an expense in its books using the following journal entry.
| Dr | Financial expense | $100 |
| Cr | Bank account | $100 |
Conclusion
A bank service charge is a fee that banks deduct from a bank account. Usually, it includes maintenance, processing, and other bank fees. The accounting for bank service charges may differ based on various conditions. In most cases, though, they are an expense that falls under financial expenses in the income statement. Companies must track these charges and regularly update the cash book accordingly.
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