Bank charges

What it means

Amounts deducted by a bank for operating an account or providing services, usually appearing first on the bank statement.

Example

A RM40 charge on the statement is entered in the cash book as a payment during reconciliation.

Why it matters

They are an expense in the income statement and a common reconciling item found on the statement first.

In practice

Bank charges are an expense. They are entered on the credit (payments) side of the cash book, which reduces the bank balance. They eventually appear among expenses in the income statement and reduce profit. The bank deducts them automatically, so they usually reach the bank statement before the business records them. This makes them a common adjustment in a bank reconciliation.

For instance, the statement shows RM60 of charges that the cash book does not yet include. The cash book balance must be reduced by RM60 to agree with the bank. The entry is a debit to a bank charges expense account and a credit to the bank account.

Students sometimes lump bank charges together with interest paid on an overdraft, but they are different. Charges are fees for running the account and processing transactions. Overdraft interest is the cost of borrowing when the balance goes below zero. Both reduce profit, but they arise for different reasons.

If you keep forgetting which items to adjust in a reconciliation, one of our teachers can give you a checklist and practise it with you. Book a trial class.

Related terms

• Bank reconciliation
• Bank statement
• Expense

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 3.3 Bank reconciliation (page 13).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.