How to Record an NSF Check & What to Do Next

An NSF (Non-Sufficient Funds) check, also commonly called a bounced or returned check, occurs when a check is presented for payment, but the account it is drawn upon lacks sufficient funds to cover the amount. This situation can arise for various reasons, such as a simple oversight in balancing an account or unexpected debits. Accurately recording an NSF check is important for maintaining precise financial records, ensuring that a business’s cash balance reflects reality, and properly tracking amounts owed by customers. This article will guide through the necessary steps for managing such occurrences.

Identifying the Financial Impact of a Bounced Check

When a check bounces, financial consequences occur. The bank will reverse the original deposit, removing the funds from your business’s account. This reversal directly impacts your cash balance.

Your bank will charge your business an NSF fee. These fees usually range from $25 to $40 per item. Your business may also choose to charge the customer an NSF fee to recover costs. This customer-charged fee typically ranges from $20 to $40. Identifying these specific amounts—the original check amount, your bank’s NSF fee, and any fee you intend to charge the customer—is important before proceeding with accounting entries.

Making the Accounting Entries for an NSF Check

Recording an NSF check involves several journal entries to accurately reflect the financial situation. First, the original deposit must be reversed to re-establish the customer’s outstanding balance and decrease your cash account. This entry debits Accounts Receivable (to show the customer still owes the money) and credits Cash (to reduce the cash balance that was initially increased).

Next, the bank’s NSF fee must be recorded. This fee is an expense to your business and reduces your cash. The journal entry debits Bank Service Charges Expense (or a similar expense account) and credits Cash. This ensures that the cost incurred from your bank is properly recognized as an operating expense.

Finally, if your business charges the customer an NSF fee, this amount needs to be added to their outstanding balance and recognized as revenue. This entry debits Accounts Receivable (increasing the amount the customer owes) and credits NSF Fee Income (or a similar revenue account).

Handling Customer Communication and Collection

After completing the necessary accounting entries, promptly communicating with the customer about the bounced check is the next step. Notifying the customer about the non-sufficient funds and any associated fees is important, as they may be unaware of the issue. A professional and clear explanation can help maintain a positive business relationship.

Customers can be offered options for resolving the payment, such as providing a new payment through an alternative method like a credit card or electronic transfer, or arranging for the check to be re-deposited if funds are now available. It is important to clearly state the total amount due, including the original check amount and any NSF fees. If the amount remains uncollected after reasonable attempts, further steps may involve sending formal demand letters or, for larger amounts, considering legal action or involving a collection agency. These actions aim to recover the funds.