A returned NSF check (Non-Sufficient Funds check) is a check that a bank declines due to the payer’s account not having enough funds to cover the amount. This can cause discrepancies between a company’s records and the bank statement. In bank reconciliation, it is essential to identify and properly adjust for returned NSF checks to ensure accurate financial records.
This topic explains what a returned NSF check is, how it affects bank reconciliation, and the correct way to handle it in accounting.
What Is a Returned NSF Check?
A returned NSF check occurs when a company deposits a check from a customer, but the bank rejects it due to insufficient funds in the customer’s account. This means the company does not actually receive the money, even though it initially recorded the deposit.
The bank typically marks the check as “NSF” (Non-Sufficient Funds) and deducts the amount from the company’s bank account. This results in an adjustment being needed during the bank reconciliation process.
How a Returned NSF Check Affects Bank Reconciliation
A bank reconciliation is a process that compares a company’s cash records with the bank statement to identify any differences. A returned NSF check creates a discrepancy that must be corrected.
1. Initial Recording in the Books
When a company receives a check from a customer, it records the deposit as:
- Debit: Cash (Increase in bank balance)
- Credit: Accounts Receivable or Revenue (Recognizing payment)
However, if the check is later returned as NSF, the company must reverse this transaction.
2. Bank Statement Adjustment
When the bank returns an NSF check, the amount is deducted from the company’s balance. This means the company’s book balance and the bank balance will not match, requiring an adjustment.
Accounting for a Returned NSF Check in Bank Reconciliation
Step 1: Identify the NSF Check
The bank statement will indicate an NSF check as a deduction, often labeled as “NSF item” or “Returned check” along with the amount.
Step 2: Adjust the Company’s Books
Since the check was originally recorded as a deposit, the company must reverse the entry to reflect the returned funds. The correct journal entry is:
- Debit: Accounts Receivable (Reversing the customer’s payment)
- Credit: Cash (Reducing the bank balance)
This ensures that the company’s records match the actual bank transactions.
Step 3: Update the Bank Reconciliation Statement
When preparing the bank reconciliation statement, the NSF check is added to the book balance as a deduction to align with the bank’s records.
Example of a Returned NSF Check in Bank Reconciliation
Let’s say a company receives a $500 check from a customer and deposits it. The journal entry would be:
Before NSF Check Return:
- Debit: Cash $500
- Credit: Accounts Receivable $500
However, when the bank rejects the check due to insufficient funds, the bank statement shows a $500 deduction. The company must adjust its records:
Reversing Entry for NSF Check:
- Debit: Accounts Receivable $500
- Credit: Cash $500
During bank reconciliation, the $500 NSF check is recorded as a deduction from the company’s book balance.
How to Prevent NSF Check Issues
To avoid issues with NSF checks, businesses can implement several measures:
1. Require Electronic Payments
Encouraging credit card payments, bank transfers, or online payments reduces the risk of bounced checks.
2. Verify Customer Funds
Using services like check verification systems can help assess a customer’s account status before accepting a check.
3. Implement a Returned Check Fee
Many businesses charge a returned check fee to recover costs associated with NSF checks.
4. Follow Up on NSF Checks Promptly
If a customer’s check bounces, businesses should quickly contact them for a replacement payment.
A returned NSF check can disrupt a company’s financial records, requiring adjustments during bank reconciliation. By properly identifying and recording NSF transactions, businesses can maintain accurate accounting records and avoid financial discrepancies. Implementing measures like electronic payments, verification systems, and returned check fees can also help reduce NSF check occurrences.