If you process enough transactions, sooner or later you’ll have to account for a returned check. A check that is returned unpaid is given many labels (such as NSF or bounced check) but the accounting treatment is the same.
The procedures outlined below work effectively for POS users in both single stores and chains. Activities such as receiving bank notices of fees and returned items typically take place at the headquarters rather than the store level, so these tasks are performed in QuickBooks financial software rather than POS. However, in POS a payment can be accepted by clicking the Take Payment button at the bottom of the New Sales Receipt window. This allows a customer to replace a returned check at any store in a chain. When POS exchanges data with QuickBooks, the customer’s account will be updated.
For this example, let’s assume we received a returned check for $50 from a customer named Customer with check returned unpaid. For handling the returned item, the bank charged a $25 fee, and we’ll only seek to recover from the customer the actual bank charges. Rather than investigating each fee separately, some firms set a fixed fee to charge customers. Hopefully, this customer will replace the unpaid check with another one, but we’ll need to record the activity in our cash account before that takes place.
Here are 2 methods to account for the returned check:
- create a new invoice to the customer for the amount of the returned check and fees your firm adds and a general journal entry for the expense of the fees the bank charged
- use 1 general journal entry for the entire process
Although the second method appears simpler, we recommend the first method because it preserves normal accounting procedures and provides a better paper trail by creating an invoice that can be sent to the customer to assist collecting the bounced check.
Method 1 – Re-invoice the Customer
Before accounting for this specific returned check, set up 2 new Other Charge Items on the Item List. These Items will only be set up once.
The first other charge will be used to invoice the customer for the amount of the returned check. At this point, it should be set to a $0.00 amount and have a Tax Code that is non-taxable. An Item Name of Returned Check will serve as a reminder for how this charge will be used. The Account must be set to the bank account into which the original returned check was deposited. Later, the amount of the returned check will be entered when the customer is invoiced for the returned check, along with any applicable bank charges. If you make deposits into multiple bank accounts, you’ll need a separate item for each bank account; in this case, include a reference to the bank account in the Item Name.
Next, add a second other charge for possible bank charges. Like the other charge for the check amount itself, this charge should have a Tax Code that is on-taxable. The amount can be set to either $0.00 (to indicate it varies depending on the situation) or a fixed fee representing a firm’s standard returned check fee. An Item Name of Returned Check Bank Charges will be a good reminder of how this charge will be used. The Account should be set to either an other income account or the expense account used for the original bank charge. In this example, we created an other income account for reimbursed bank charges.
With the other charges properly set up, make a general journal entry for just the charge the bank deducted from your bank account. To do that, click the Company->Make General Journal Entries… menu and enter the actual bank charge as a credit to the bank account and a debit to bank charges expenses as follows:
Next, click on the menu Customers->Create Invoices (or use the keyboard shortcut Ctrl + I) to invoice the customer for both the amount of the returned check and the fee charged by your firm. In our example, the returned check was $50, and the bank charges are $25.
Here’s the Create Invoices window:
This invoice will be reflected on the customer’s account and will provide a document to present to the customer to collect payment. Hopefully, the customer will replace the returned check. At that point, use the normal procedure for recording a customer payment (Customers->Receive Payments) to record the replaced payment and depositing the funds (Banking->Make Deposits).
This approach has some important benefits. It creates an invoice to help collect both the unpaid amount and the bank charges. It also preserves the normal work flow for processing payments and making deposits. It’s also the approach recommended by Intuit in the documentation for QuickBooks.
To review the debits and credits of each step, press the Journal button (or Ctrl + Y). The general journal entry we first entered accounted for the actual bank charge. When we recorded the invoice, we produced a debit to AR in the amount of $75, a credit to our bank account for the $50 check, and a credit to an other income account for $25. The invoice in effect reduced the bank account by the amount of the returned check, so at this point, our bank balance is accurate.
Method 2 – Make 1 General Journal Entry
Some prefer to accomplish all of the above in just a single general journal entry. To do that, click on the Company->Make General Journal Entries… menu and make these entries:
- AR: debit of $75 with the customer’s name entered in the Name field
- Bank account: credit of $50 to reduce the bank balance
- Bank account: credit of $25 to reduce the bank balance
- Bank service charges (expense): debit of $25
- Reimbursement income: credit of $25 to record the revenue (optionally enter the customer’s name in the Name field)
Ideally, although it’s not shown in the screen shot below, the debit to AR should be entered on the first line of the general journal entry.
The steps outlined above for recording a customer payment (Customers->Receive Payments) and depositing the funds (Banking->Make Deposits) are then used to complete the accounting when the customer replaces the returned check.