What Is the Entry to Record a $20 Bank Service Charge?

A bank service charge is a fee from a financial institution for services to an account holder. These charges are a common business expense. They can cover routine account maintenance, the processing of specific banking activities, or penalties for certain financial behaviors like insufficient funds.

Identifying Bank Service Charges

Businesses discover bank service charges by reviewing their monthly bank statements. Both paper and digital statements clearly list these deductions as separate line items, often described as “service charge,” “account maintenance fee,” “transaction fee,” or “NSF fee” for non-sufficient funds. Banks levy these charges to cover administrative costs and also impose fees for specialized services like wire transfers, or as penalties for activities such as overdrafts. Regularly reviewing bank statements helps ensure all deductions are understood and properly accounted for.

Making the Journal Entry

Recording a bank service charge requires a specific journal entry that reflects the increase in an expense and the decrease in cash. The entry involves a debit to an expense account, typically titled “Bank Service Charge Expense” or “Bank Fees Expense.” Debiting this account increases the expense, which ultimately reduces the business’s equity. This aligns with the accounting rule that expenses are increased with debits.

Simultaneously, the journal entry requires a credit to the “Cash” or “Bank” account. Crediting the cash account indicates a reduction in the business’s cash balance, as the funds have been paid to the bank. This action aligns with the accounting rule that assets, such as cash, decrease with credits. For a $20 bank service charge, the journal entry would include a debit of $20 to Bank Service Charge Expense and a credit of $20 to Cash. This precise entry ensures the financial records accurately reflect the transaction.

How Bank Service Charges Affect Financial Reports

Once recorded, bank service charges impact a business’s primary financial statements. The “Bank Service Charge Expense” account appears on the Income Statement. This expense directly reduces the company’s net income for the accounting period. A $20 bank service charge, therefore, lowers the reported profitability by that exact amount.

The corresponding reduction in the “Cash” account affects the Balance Sheet. The decrease in cash reduces the total current assets reported by the business. Bank service charges are generally classified as operating expenses, representing routine costs incurred during normal business operations.