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Journal Entry for Bounced, Returned, NSF Check – Easy Guide

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Businesses commonly encounter bounced, returned, or NSF (Non-Sufficient Funds) checks. These occur when a check is returned due to insufficient funds in the payor’s account, necessitating specific follow-up actions and accounting steps, especially for the accounts receivable (AR) department. While the steps to address a bounced check are straightforward, ensuring they are correctly recorded in the general ledger is crucial for maintaining accurate accounting records.

In this guide, we will present clear, practical journal entry examples to illustrate how these transactions should be recorded, including how to deal with the bank fees associated with the bounced check.

Definition of a Bounced, Returned, or NSF Check

A bounced or NSF (Non-Sufficient Funds) check is a financial hiccup that occurs when a bank cannot honor a check due to insufficient funds in the payor’s account. Essentially, it means the check cannot be processed because the account does not have enough money to cover the amount written on it. This situation leads to inconvenience and can have a financial impact, especially since many banks charge a fee for a bounced check.

Journal Entry Example of a Bounced, Returned, or NSF Check

Scenario: The Pho My Life (PML) Noodle Shop, a popular local eatery, receives a $500 check from Mr. Bounce for a catering event. Unfortunately, the check bounced due to insufficient funds in Mr. Bounce’s bank account. In response, PML needs to adjust its accounting records to reflect this financial setback for now.

Journal Entry for Bounced, Returned, NSF Check - JE

The journal entry involves debiting the Accounts Receivable and crediting the Cash account. This entry is made because, with the check bouncing, the cash PML thought it had received no longer exists in its account. Therefore, by debiting Accounts Receivable, PML acknowledges that the customer still owes the amount. At the same time, crediting the Cash account reverses the initial recording of the check as cash, thus accurately portraying PML’s reduced cash balance. 

This entry ensures that PML’s general ledger correctly reflects the outstanding amount owed by Mr. Bounce while also adjusting the cash balance to mirror the actual funds available.

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Journal Entry Example of the Bank Fees due to Returned Check

Scenario: When the Pho My Life (PML) Noodle Shop’s bank notifies them of the bounced check from Mr. Bounce, they also inform PML of a $25 bank fee.

This fee is a standard charge imposed by banks for processing NSF transactions, and in most cases, it becomes the responsibility of the payor, which, in this instance, is Mr. Bounce. However, initially, Pho My Life (PML) Noodle Shop, as the payee, is the one charged by the bank. Therefore, it’s essential for PML to recover this fee from Mr. Bounce to ensure they are not financially penalized for the bounced check.

Recording the Billable Bank Fee

Journal Entry for Bounced, Returned, NSF Check - record bank fee

To account for this, PML first records the bank’s charge in its general ledger. They do this by debiting the “Other Receivable” account for $25, which reflects the fee that is now owed to them by Mr. Bounce. Using “Other Receivable” is recommended as “Accounts Receivable” is usually used for trade activities, but that’s just a preference and not a rule.

At the same time, they credit their Cash account for $25, representing the deduction from their cash balance due to the bank fee.

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Billing the Payor for the Bank Fee

Subsequently, PML issued an invoice to Mr. Bounce for the $25 bank fee, effectively transferring the responsibility for this fee to him. When Mr. Bounce settles this fee, here is the journal entry:

Journal Entry for Bounced, Returned, NSF Check - bank fee settled

PML then records the receipt of payment by debiting their Cash account for $25, showing the increase in cash. Simultaneously, they will credit the “Other Receivable” account for $25, indicating that the bank fee receivable from Mr. Bounce has been cleared. 

This process ensures that PML is not left bearing the cost of the bank fee, and the financial impact of the bounced check is properly addressed in their accounting records. In other words, the net impact on the general ledger should be zero after Mr. Bounce settles the bank fee associated with the bounced/NSF check.

Writing Off the Fee

For some reason, Mr. Bounce refused to pay the bank fee, claiming his checking account had sufficient balance to process the check. 

When it becomes clear that Mr. Bounce will not reimburse the $25 bank fee, PML must make a journal entry to write off this receivable. 

Journal Entry for Bounced, Returned, NSF Check - bank fee written off

The journal entry involves debiting an “Other Operating Expense” account for $25 (or any other preferred P&L account). This action effectively recognizes the bank fee as an expense in PML’s Profit and Loss (P&L) statement, illustrating its impact as a loss to the business. Simultaneously, PML credits the “Other Receivable” account for $25. This credit entry removes the bank fee from their receivables, acknowledging that this amount will no longer be collected from Mr. Bounce.

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Absorbing the Fee without Billing the Payor

Suppose the Pho My Life (PML) Noodle Shop decides to absorb the bank fee as a kind gesture for their close friend, Mr. Bounce. In this situation, the journal entry becomes more straightforward since PML chooses not to bill Mr. Bounce for the bank fee.

Journal Entry for Bounced, Returned, NSF Check - bank fee absorbed

To reflect this decision in their accounting records, PML would make a direct journal entry to account for the bank fee as an expense. They would debit the “Other Operating Expense” account for $25 (or any other preferred P&L account). This debit entry recognizes the bank fee as a direct cost to the business, which PML has decided to bear. At the same time, PML would credit their Cash account for $25. This credit entry represents the actual reduction in PML’s cash balance due to the bank deducting the fee.

By making this entry, PML’s general ledger accurately reflects the decrease in cash due to the bank fee while also showing the expense incurred due to their decision to absorb the fee for Mr. Bounce.

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Key Takeaways

  • Bounced/Returned/NSF Checks: These occur when there are insufficient funds in the payor’s account to cover a check. They can lead to bank fees and require follow-up actions and careful accounting.
  • Journal Entry for a Bounced/Returned/NSF Check: The journal entry is to debit Accounts Receivable and credit Cash, reflecting the adjustment for non-receipt of cash and acknowledging the owed amount still exists.
  • Journal Entry for the Related Bank Fee
    • Assuming the payee would bill the payor for the bank fee, the initial journal entry is to debit Other Receivable and credit Cash. When the payor settles the bank fee, simply reverse this journal entry by debiting Cash and Crediting Other Receivable. 
      • If the fee is deemed uncollectible, write it off by debiting Other Operating Expenses (or other preferred P&L account) and crediting Other Receivable to acknowledge the loss.
    • Suppose the payee decides to voluntarily absorb the fee without billing the payor. In that case, the journal entry is to debit Other Operating Expenses (or other preferred P&L account) and credit Cash for the amount deducted by the bank.

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