How is a returned or non-sufficient-funds check treated in a bank reconciliation?

Which direction does the returned item run?

Before you record anything, work out whose check it is. The logic of each case tells you what to look for on the statement.

• A check you deposited came back. A customer paid you by check, you deposited it, and the bank that check was drawn on refused to pay it. Your bank takes the money back out of your account, so it is taken back as a debit for the check amount. This is the common case, and most of what follows deals with it.
• A check you wrote came back. You paid a supplier by check and your own bank refused to pay it because your balance was too low: a check the company issued that its bank did not honor because the balance was less than the amount of the check. That check never cleared, so no debit for it appears on your statement, only any fee your bank charges.

References use "NSF" for a returned check in either direction, so the label alone does not tell you which case you are in. The two cases produce mirror-image entries.

Insufficient funds is not the only reason a check comes back. A returned item can also be a check drawn on an account that has been closed, or one the writer stopped payment on. The bookkeeping below is the same whatever the reason. What changes is how likely you are to be paid in the end.

What entry reverses a returned customer check?

When you deposited the customer's check, the books recorded a receipt. On the accrual basis that entry debited cash and credited the customer's accounts receivable, which cleared the invoice. When the check comes back, your bank reverses the funds it had credited to you and may charge a fee.

Your books do not show that reversal until you record it. A returned check is a transaction the bank knows about and the company does not, and transactions of that kind have to be journalized in the company's records. The reversal is a new entry:

This single entry puts back two things at once:

1. Cash goes down by the amount the bank took back.
2. The customer owes you again. The check did not pay the invoice, so the invoice it appeared to settle is open again, for its full amount. That is why the debit goes to the customer's receivable.

Post the debit to the customer's own receivable record, not to a general "returned checks" account. The reinstated amount then shows up on the customer's statement, in the aged receivables report and in your collection follow-up. If you reverse only the cash and leave the invoice marked paid, the customer looks settled and nobody chases money you never received.

Why reverse the receipt instead of deleting or editing it?

The original deposit really happened. Your bank credited the check to your account, and that credit is on the statement for the period you deposited it. If that period has already been reconciled, the deposit is one of the items that made it balance.

If you delete the receipt or edit its amount to zero, three things go wrong:

• The earlier reconciliation no longer matches the statement it was reconciled against.
• The deposit and the return disappear from the record. Anyone looking later cannot see that the customer's check bounced.
• The customer's payment history is rewritten. That is exactly the history you may need if you chase the debt or later have to decide whether to write it off.

A separate reversing entry, dated when the bank took the money back, keeps the original deposit, the returned item and the reinstated balance all visible. The general choice between editing, voiding, deleting and reversing a transaction has its own question.

What if the check was part of a batched deposit?

Often the returned check went into the bank with several others, and the bank statement shows one deposit total. You cannot reverse that whole deposit. Only one check inside it failed.

Work from the bank's notice of the returned item and your deposit slip or deposit record. Find the check whose amount and payer match the returned item. Then reverse only that customer's payment, for only that amount. The other checks in the batch cleared, and their receipts stay as recorded. If your software grouped several customer payments into one deposit, leave that deposit exactly as recorded. Record a separate reversal against that one customer's payment, for that amount only, dated when the bank took the money back. The deposit total, the other customers' receipts and the earlier reconciliation stay as they were.

How does the entry change on cash-basis books?

The entry above assumes the accrual basis: the sale was recorded earlier as a receivable, and the check only cleared that receivable.

On the cash basis, income is counted when it is actually or constructively received. The original deposit therefore recorded the income itself: a debit to cash and a credit to sales or service income. The reversal takes that income back out:

Cash-basis books usually carry no receivable account, so the customer's reinstated obligation is not in the ledger. Mark the invoice unpaid again in whatever list of open invoices you keep, so the amount is still pursued. When the customer does pay, the payment is recorded as income at that point, once.

How do you keep the bank's charge separate from the returned item?

A returned check can bring two debits on the statement: the returned item itself, for the exact amount of the customer's check, and a charge from your bank for handling it. The recipient of a bounced check may pay a deposited-item return fee. The writer's own bank usually charges the writer a non-sufficient-funds fee.

Record them as two separate entries, even if they appear on the same day:

• The returned item goes to the customer's receivable, as above, for the check amount and nothing else.
• The charge is recorded on its own. How to account for the bank's charges, and whether to try to recover one from the customer, belongs to the question on bank-charged fees.

If you combine the two, the customer's reinstated balance is overstated by the fee, and the fee cannot be tracked or analyzed on its own.

Where do the returned item and the charge sit in the reconciliation?

Both belong on the book side. The bank has already taken both amounts out of the account, so the bank balance needs no adjustment for them. Your ledger has not, so the book balance is too high until you record them.

In the reconciliation, list each as a separate deduction from the book balance. Then post the two entries so the ledger's cash balance equals the adjusted book balance. Neither item is an outstanding check or a deposit in transit. They are bank-side events that the books have not yet caught up with.

What does it look like with numbers?

Original figures, accrual basis. On March 28 a customer, Harbor Supply, paid an invoice of 1,250.00 by check. You deposited it that day with two other checks, and the bank statement shows one deposit of 3,400.00. The March reconciliation balanced with that deposit in it.

On April 6 the April statement shows two debits, which your bank might label along the lines of "Returned deposited item 1,250.00" and "Returned item fee 15.00". The wording, and whether the fee is a separate line, vary by institution. Assume the April statement's ending balance is 20,000.00, the ledger shows 21,265.00 before these two items are recorded, and there are no other reconciling items.

April reconciliation, before and after:

Entries dated April 6:

After posting, the ledger's cash balance is 20,000.00 and matches the bank. Harbor Supply's invoice shows 1,250.00 open again. The March 28 receipt and the March reconciliation are unchanged.

Second version: the check is paid when it is deposited again. On April 14 the check is presented again, this time it clears, and the statement shows a credit of 1,250.00. Record it as a new receipt against the reinstated receivable:

Once this entry is posted, the April 14 credit matches the statement line and needs no reconciling item. The two April 6 deductions stay on the reconciliation as before.

Follow the customer's balance through: 1,250.00 invoiced, 1,250.00 paid March 28, 1,250.00 reinstated April 6, 1,250.00 paid April 14. The customer now owes zero. Cash has gone in, out and in again, so the net effect is one receipt of 1,250.00. The fee stays as its own entry, recorded as the bank-fees question directs.

What happens if the bank presents the check again?

A returned check is not always the end of it. A bank may try to put an insufficient-funds check through two or three times. No law sets how many times a check can be resubmitted, and there is no guarantee it will be resubmitted at all. Your bank's deposit account agreement states its own policy on presenting checks again. Read it, so you know whether a returned check will come back to you or be tried again automatically.

The bookkeeping rule is simple: record exactly what the statement shows, one entry per bank line.

• If the statement shows the item charged back and later credited again, you make two entries: the reversal, and later the new receipt against the reinstated receivable. This is the second version above.
• If the check was tried again and paid before any chargeback reached your account, no amount ever left the account. Record nothing, and leave the original receipt as it is.
• Do not record the later clearance as fresh income or a new unapplied payment. The reversal already reopened the invoice. The new receipt has to close that reopened balance. Otherwise the payment is counted twice and the customer ends up with a credit balance nobody can explain.

If you took the returned check back and deposited it yourself, it appears as a new deposit. Treat it the same way: one receipt against the reopened invoice. Repeated redeposits can lead to additional bank fees, so record each fee line separately.

What if a check the business wrote comes back unpaid?

This is the mirror image. You recorded the payment when you wrote the check: a debit to accounts payable (or to the expense) and a credit to cash. If your bank refused to pay it for lack of funds, the money never reached the supplier. The amount you owed the supplier is unpaid again.

Reverse the payment with a new entry, leaving the original check record in place:

In the reconciliation, the check stops being an outstanding check, because after the reversal the books no longer carry the disbursement. Your own bank's NSF fee is a separate book-side deduction, recorded on its own as above. The supplier may deposit the check again, and it may be presented more than once. Your bank can charge its fee each time the check is presented, so expect a fee line for each attempt and record each separately. If it clears later, record the payment again against the reinstated payable, once. If you pay the supplier another way instead, record that payment and make sure the old check cannot be presented again.

Where is the reversal posted if the earlier period is already reconciled?

The date that governs is the date your bank took the money back, not the date of the original deposit. In the example the check was deposited in March, but the bank debited the account on April 6. So the return is an April item. It belongs in the April books and the April reconciliation, as a book-side adjustment of the period whose statement shows it. Posted there, the March deposit, the March statement and the completed March reconciliation all still agree.

Do not back-date the reversal into March to "tidy up" the month the sale happened. That changes a reconciliation already signed off, and any figures reported from it.

Sometimes the bank debit itself falls inside a period that has already been closed and reported. For example, the item was debited on March 30, but nobody noticed until after March was closed. Then the question is no longer where the bank recorded the return. It is how you correct a closed period, which depends on your close policy and on what has already been issued. Settle that under your closed-period correction procedure before you choose a posting date.

When does the reinstated balance become a write-off question?

After the reversal, the amount is an ordinary open receivable, and you pursue it like any other unpaid invoice. It stays a collection matter while there is a realistic prospect of payment. That covers a check the bank is still presenting again, a customer who has promised to replace it, or a balance you are actively chasing.

It becomes a write-off question when this specific customer's balance has been identified as uncollectible. That is a judgment for the write-off question, not this one. A stopped payment or a closed account changes how likely you are to be paid; on its own it does not decide that judgment. At that point, deciding to write the amount off, and what to keep on file to support it, is a separate decision with its own question. Do not let the reinstated balance sit indefinitely. Review it with the rest of your aged receivables at each close.