How to Record an NSF Check Journal Entry

An NSF, or Non-Sufficient Funds, check occurs when a check cannot be honored due to insufficient account balance. Proper accounting for an NSF check is important as it directly impacts a company’s available cash and alters the customer’s outstanding balance. Failing to record these events correctly can lead to misstated cash positions and inaccurate accounts receivable balances.

Understanding the Accounting Impact

An NSF check event requires a business to adjust several financial accounts. When a check is initially received and deposited, the cash account increases, and the customer’s accounts receivable balance decreases. However, upon notification that the check has bounced, this initial transaction must be reversed, effectively reinstating the customer’s obligation to pay. The cash account is affected again, as the funds that were thought to be received are now withdrawn or never fully materialized.

The business’s bank typically charges a fee for processing a returned check. This bank charge is an expense that reduces the business’s cash. Many businesses also charge their customers a fee for the returned check. This customer charge becomes an additional amount owed and is recognized as income.

Recording the Returned Check

Recording a returned check involves reversing the initial payment entry. The goal is to show the customer still owes the money and that the business’s cash balance has not increased. This is accomplished by increasing the Accounts Receivable balance and decreasing the Cash balance.

The Accounts Receivable account is debited to reinstate the customer’s debt. The Cash account is credited to reduce cash, acknowledging funds were not received. For example, if a customer’s $500 check was returned, debit Accounts Receivable for $500 and credit Cash for $500. This direct reversal is the primary accounting action for the returned check itself, separate from any associated fees.

Recording Related Fees

An NSF check often incurs two types of fees that require separate accounting entries. First, your financial institution typically charges a fee for processing the returned check, often $25 to $35. This bank charge is an operating expense for the business and reduces the cash available. To record this, an expense account such as “Bank Charges Expense” or “Returned Check Expense” is debited, and the Cash account is credited.

Second, your business may charge the customer a fee for the returned check, often $20 to $40. This fee increases the amount the customer owes and is recognized as income for your business. To record this, Accounts Receivable is debited to increase the customer’s outstanding balance. An income account, such as “NSF Fee Income” or “Returned Check Income,” is credited to recognize the revenue generated from this charge.