What Is the Journal Entry to Adjust for an NSF Check?
Understand how to properly reconcile your cash accounts when a received payment doesn't clear. Ensure your financial statements reflect true balances.
A Non-Sufficient Funds (NSF) check, often called a bounced check, occurs when a bank cannot honor a check due to insufficient funds in the payer’s account. Businesses must make specific accounting adjustments to accurately reflect their financial position. Accounting for NSF checks involves reversing the initial, erroneous deposit and tracking the outstanding amount owed.
What is an NSF Check?
An NSF check occurs when the issuer lacks sufficient funds in their bank account, or if the account is closed. When presented, the bank refuses payment and returns the check unpaid to the recipient’s bank.
The immediate impact on the recipient’s bank account is a reversal of the original deposit. The funds that were initially credited to the recipient’s account are deducted, effectively negating the perceived increase in cash. This action by the bank signals that the payment was not successfully received, requiring the recipient business to adjust its financial records accordingly. This situation highlights the importance of monitoring bank statements closely to identify such reversals promptly.
The Initial Journal Entry for an NSF Check
When a business receives notification of an NSF check, the first accounting step is to reverse the initial, erroneous deposit. This involves decreasing the Cash or Bank account, as the funds were never truly received. At the same time, the amount owed by the customer needs to be re-established.
To achieve this, the primary journal entry involves debiting Accounts Receivable and crediting Cash. For example, if a customer’s $500 check bounces, the entry would be a debit of $500 to Accounts Receivable and a credit of $500 to Cash. This action restores the customer’s outstanding balance, indicating they still owe the business, and reduces the cash balance to reflect the returned funds. This ensures the accounting records accurately show the business’s true cash position and the customer’s ongoing obligation.
Accounting for Bank Fees Related to NSF Checks
Banks frequently charge a fee to the recipient business when they process an NSF check. This “returned item fee” compensates the bank for the administrative work involved in handling the unpayable check. These fees typically range from $20 to $35, with the average being around $34 according to the Consumer Financial Protection Bureau.
Recording this bank fee requires a separate journal entry to distinguish it from the original check amount. The entry involves debiting a Bank Service Charge Expense account and crediting the Cash or Bank account for the fee amount. For instance, if a bank charges a $30 fee for the NSF check, the business would debit Bank Service Charge Expense for $30 and credit Cash for $30. This entry reflects the direct cost incurred by the business due to the bounced check, reducing the cash balance further and recognizing the expense.
Subsequent Journal Entries for Re-deposited or Collected Funds
After an NSF check, the business will seek to collect the funds from the customer. This might involve re-depositing the check if the customer assures sufficient funds, or collecting payment through other means like a direct transfer or a new payment. Once the funds are successfully received, a new journal entry is necessary to complete the accounting cycle.
This entry typically involves debiting the Cash or Bank account and crediting the Accounts Receivable account. For example, if the $500 from the bounced check is eventually collected, the business would debit Cash for $500 and credit Accounts Receivable for $500. This action increases the cash balance and simultaneously reduces the customer’s outstanding accounts receivable balance to zero, clearing their debt. This final entry ensures the company’s financial records accurately reflect the successful receipt of payment and the closure of the initial NSF issue.