How to Record a Returned Check in Accounting
Master the essential accounting steps for recording returned checks. Ensure accurate financial records and effective recovery for your business.
Master the essential accounting steps for recording returned checks. Ensure accurate financial records and effective recovery for your business.
A returned check, often referred to as a “bounced check” or “Non-Sufficient Funds (NSF) check,” poses a common challenge for businesses. When a check is returned, it signifies that the payment intended for the business did not successfully clear the payer’s bank account. This situation necessitates specific accounting adjustments to accurately reflect the business’s financial position and to manage the subsequent recovery of funds. Properly recording these events is important for maintaining accurate financial records and ensuring cash flow is correctly represented.
A returned check occurs when a bank cannot honor a check due to various reasons, most commonly insufficient funds in the payer’s account. This means the individual or entity who issued the check did not have enough money to cover the payment amount at the time the check was presented. Other reasons for a check being returned include a closed account, a stop payment order, or even discrepancies like an incorrect signature or altered information.
The immediate financial impact on a business receiving a returned check is a reversal of the expected cash inflow. The initial deposit, which temporarily increased the business’s cash balance, is effectively negated. Consequently, the business’s actual cash balance decreases, and the customer’s outstanding balance, recorded as Accounts Receivable, increases to reflect the amount still owed.
When a check is returned, the first accounting step involves reversing the original entry that recognized the payment. This reversal is necessary because the funds initially thought to be received were not actually collected. The core of this adjustment is to reinstate the customer’s debt to the business.
To record this reversal, a journal entry is created by debiting Accounts Receivable for the amount of the returned check. This action re-establishes the customer’s obligation to pay, reflecting that the amount is still outstanding. Simultaneously, the Cash or Bank account is credited for the same amount, which accurately reduces the business’s cash balance to reflect the non-receipt of funds. It is also important to update the specific customer’s ledger within the accounts receivable system to clearly show the uncollected amount.
Beyond the reversal of the initial transaction, a returned check often incurs additional fees that require separate accounting entries. The business may face a bank service charge from its own financial institution for processing the returned item. This fee is an expense to the business. To account for this, the business debits a Bank Service Charges Expense account and credits its Cash or Bank account, reflecting the reduction in cash due to the bank’s fee.
Additionally, businesses may charge a fee to the customer who issued the returned check to recover their own costs and inconvenience. To record this customer-imposed fee, the business debits Accounts Receivable, increasing the total amount the customer owes. A corresponding credit is made to an income account, such as Returned Check Fee Income, recognizing this as revenue to the business.
After accurately recording the returned check and any associated fees, the business must focus on collecting the outstanding amount. A first step involves contacting the customer to inform them about the returned check and the revised outstanding balance, which now includes any additional fees. Clear, professional communication is important to maintain goodwill and clarify the situation.
When arranging re-payment, businesses should request a new form of payment that guarantees funds, such as a certified check, money order, or electronic bank transfer. Re-depositing the original check might be an option if the customer confirms sufficient funds are available, but this carries the risk of incurring another fee if it bounces again.