Accounting for Bank Service Charge: Definition, Journal Entries, Example, and More

In most jurisdictions, transacting in cash may be acceptable. While paying and receiving cash is the primary source of compensation for most transactions, some may prefer other options. The most prominent of these are bank accounts and transfers. For most individuals and companies, banks have taken over cash transactions. Some jurisdictions even require entities to make transactions above a specific limit through banks only.

Several reasons exist about why most entities prefer banks. One of the most crucial of these is to allow safekeeping of their valuable cash resources. It is also one of the reasons why banking has become prevalent in businesses. Most companies own at least one bank account through which they complete various transactions. However, these accounts may also come with bank services charges.

What are Bank Service Charges?

Services charges are prevalent in all services industries. These may include the hospitality, banking, travelling, and education industries. Similarly, these charges allow the underlying supplier to provide services in exchange for compensation. This compensation constitutes the primary source of revenue for many companies and service providers.

A service charge is a fee charged to customers for services related to a product or services. Usually, the customer receives this charge when the transaction gets completed. A bank service charge, therefore, is a fee charged by the bank to its customers. It includes the amount debited to the customer’s account for the services that the bank provides.

With bank service charges, the transactions occur through the customer’s bank account. Usually, the bank charges these amounts to those accounts directly. In most circumstances, these charges relate to the transactions that customers undertake. However, bank service charges may also apply to the account itself or various other services. Therefore, these charges may also include fees charged to accounts without any transactions.

Bank service charges compensate the bank for the services they provide to their customers. The account holders also receive better services in exchange for these fees. Banks may charge various types of bank service charges to their customers’ accounts. Some of these charges may be regular, while others apply to specific transactions or actions.

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What Are the Types of Bank Service Charges?

Banks may charge their customers various charges. For most companies, these charges fall under the same category of bank charges. However, there are many differences between these, which may be crucial sometimes. Some of the primary types of bank services charges include the following.

Maintenance fees

The primary service provided by banks to customers is the provision of a bank account. This account exists even when customers do not make any transactions. However, it still costs the bank to maintain these accounts. Therefore, most banks charge an amount known as the maintenance fee. This fee represents the charge to provide a bank account to customers. Another name used for this fee is the service charge.

ATM fees

Some banks also provide customers with debit and credit cards. These cards allow customers to use their account fees or credit facilities directly from the bank. However, they also come with some additional costs. Usually, when customers use these cards to make transactions, the bank charges them an ATM fee. Similarly, providing, renewing and maintaining these facilities may also come with expenses for the customers.

Transaction fees

As mentioned, banks also charge customers for the transactions they make. Usually, banks debit every customer’s account for each transaction made. Some banks may also charge customers for specific transactions while exempting others. Regardless of the type of transaction, these fees include charges for receiving or paying money through the bank account.

Transfer fees

Some banks may include transfer fees as a part of their transaction fees. Others may charge customers for any transfer into and out of the account under transfer fees. Usually, both bank accounts get debited for transfer fees. These fees will include all sources that require sending funds from one account to another. Therefore, they will consist of wire, online, direct and cheque transfers.

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Overdraft fees

Some banks allow customers to withdraw money even when they don’t have any balance. Any amount taken out over the limit is known as an overdraft. Usually, banks have a limit for how much customers can withdraw, defined in their contract. However, banks charge fees related to these amounts, which often include daily interest.

Insufficient funds fees

Sometimes, customers may send a transaction for the bank to process. However, they may not have enough funds to complete it. Insufficient funds fees occur when the customer makes these transactions. For the bank, the process still involves processing the transaction. However, it will not complete due to the insufficient balance in the account. The banks will still charge the customer’s account for the process.

Account opening/closure fees

When customers open a bank account, the bank may require a service charge. However, most banks provide these services free of charge. Nonetheless, when closing accounts, banks will charge the customers. There are no exemptions for these fees. Account opening/closure fees are one-time bank service charges. Therefore, customers do not need to worry about them regularly.

What is the accounting for Bank Service Charges?

The accounting for bank services charges is straightforward. Any amount that customers get charged as a bank service charge will become an expense. Companies or individuals with bank accounts must treat them in specific accounts. However, most entities have one ledger account for these, which will fall under bank charges.

Some entities may also have several bank accounts. The accounting for bank service charges will become complex for them. Usually, this process involves identifying the account to which these charges relate. Once done, they can credit those accounts with the amount which the bank debits to their accounts. The expense account usually remains the same.

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The process for accounting for bank service charges usually constitutes a part of bank reconciliation. Entities cannot predict these charges as the bank adds them to their accounts without notification. Therefore, they must wait until they receive their bank statements and reconcile them with the ledgers. During this process, they will identify bank charges and account for them accordingly.

What Are the Journal Entries for Bank Service Charges?

The journal entries for bank services charges are straightforward. It involves debiting the bank charges account to which those charges relate. Most companies maintain a single ledger account for all bank-related expenses. Others, however, may have individual ledger accounts for each. Regardless of the segregation, it will fall under the expenses category.

Similarly, it involves crediting the bank account to which these charges relate. For a company with a single bank account, the process will be straightforward. For companies with various bank accounts, however, it will be more complex. With a robust bank reconciliation process, this process should also be more straightforward.

Overall, the journal entries for bank services charges will be as follows.

DateParticularsDrCr
 Bank service chargesXXXX 
 Bank XXXX

Example

A company, ABC Co., has two bank accounts. It maintains two ledger accounts for each bank. However, ABC Co. charges all bank-related expenses to a single account, known as “bank service charges”. During the year, bank ‘A’ charged the company $10,000 for various bank charges. For the ‘B’ account, these charges only include $5,000.

ABC Co. uses the following accounting entries to record charges for bank account ‘A’.

DateParticularsDrCr
 Bank service charges$10,000 
 Bank ‘A’ $10,000

For the ‘B’ bank account, the journal entries are as follows.

DateParticularsDrCr
 Bank service charges$5,000 
 Bank ‘B’ $5,000

Conclusion

Banking transactions have increased due to the rising demand for banks. However, these transactions have also given rise to various bank services charges. A bank service charge is an expense from banks to customers. Several types of these charges may exist. The accounting for bank service charges is relatively straightforward, as mentioned above.

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