Not sufficient funds check bank reconciliation entries
A customer pays by check, you deposit it and record the payment, and two weeks later the bank takes the money back with a not sufficient funds notice. Here is how that returned check shows up in the bank reconciliation and how to record it.
| Date | Bank line | Amount | Suggested entry |
|---|---|---|---|
| 04/03 | Monthly account feeBank charges | -18.00 | Bank charges |
| 04/11 | Returned deposit, NSFAccounts receivable | -740.00 | Accounts receivable |
| 04/19 | Card processor payoutClearing account | 1,206.35 | Clearing account |
| 04/30 | Interest paidInterest income | 3.12 | Interest income |
What happens to an NSF check
When you deposited the check, your books increased cash and reduced the customer's balance. The bank first credited the deposit, then could not collect it from the customer's bank and reversed it, usually with a returned item fee. Now the bank balance is lower than your books, and the customer still owes you the money.
Where it goes in the reconciliation
An NSF check is an item only the bank knew about, so it goes on the book side. Subtract the returned check and the fee from the balance per books to get the adjusted book balance.
| Line | Amount |
|---|---|
| Balance per books | $12,640.00 |
| Less NSF check from customer | $720.00 |
| Less returned item fee | $15.00 |
| Adjusted book balance | $11,905.00 |
The journal entries
| Entry | Debit | Credit | Amount |
|---|---|---|---|
| Reverse the customer payment | Accounts receivable | Cash | $720.00 |
| Record the bank fee | Bank service charges | Cash | $15.00 |
Many businesses pass the fee on to the customer if their terms allow it. In that case debit accounts receivable for the fee as well and invoice it.
Collecting the money again
- Contact the customer quickly and ask for a replacement payment by a guaranteed method.
- Some banks let you redeposit the check once, check with yours before you do.
- If you redeposit and it clears, record it as a new deposit, the reconciliation will match it normally.
- Follow your state rules and your payment terms before charging returned check fees.
Reducing returned checks
Returned checks cost time and fees on both sides. For larger orders, ask new customers for an electronic payment or a certified check, deposit checks the day they arrive so problems surface early, and keep a note on customers whose checks have been returned before. None of this removes the need to reconcile, but it keeps the list of returned items short.
Mistakes to avoid
- Deleting the original payment instead of reversing it, which loses the history.
- Leaving the returned check as an unexplained difference in the reconciliation.
- Forgetting the fee, which is a separate line on the statement.
Spot returned checks automatically
BankReconciler recognizes returned items on the statement, pairs them with the original deposit and suggests both entries above. See how it fits into the full bank reconciliation example or read the bank reconciliation definition.