Please Note: Some of these techniques may require permissions higher than the user name allows. If so, see your company accounting administrator or advisor.
A deposited check that is returned by the maker's bank can pose problems. It is necessary to adjust the balance of the bank account affected by a bad check, and to reverse the payment applied to the customer's Account Receivable. Several popular methods intended to record these entries unfortunately create errors in other areas in QuickBooks.
Part A reviews two common errors in recording NSF checks.
Part B details setting up two necessary QuickBooks items for handling NSF payments.
Part C provides step by step procedures to insure that you do not lose track of the debt still owed by a customer who writes a bad check, keep your bank balance straight, and help to recoup the bank charge that likely came with that returned check.
One common mistake in a handling bounced check is to return to the payment form that was used to record the payment and using the Un-Apply Payment option. In our example, we assume that customer Don Giovanni pays Invoice Number 627 with a check that bounces.
At first glance, Un-Apply Payment seems to work: The subject Invoice is no longer marked PAID.
But if we go to the Customer Balance Total in the on the Accounts Receivable schedule, we see the error that un-applying the payment created. In our example, the balance owed by the customer should be $120.19, the amount of the re-opened Invoice. His balance, however, is reported as zero.
This is because the Un-Apply Payment action did not reverse the payment, but merely detached the payment from the invoice. This is demonstrated by looking at the customer’s Accounts Receivable ledger, where you will find both a debit balance of $120.19, reflecting the unpaid Invoice created by un-applying the payment, as well as a credit of $120.19, the payment that remains on the books. The result is an erroneous balance of zero.
Avoid the temptation to delete the payment. This can only be done after deleting its recordation as a deposit, so it eliminates records in the checking account and payment history. Although these can be retrieved if the Audit Trail feature is active, a better practice is to record reversals of the entries.
A second common, and incorrect, method of handling NSF payments is to create a second invoice that duplicates the first and re-bill the customer. While this corrects the Account Receivable of the bounced check maker, it also creates new problems; viz:
The new invoice doesn’t help at all with the necessary bank account entries that must be made to record the bounced check.
So. How to handle the problem?
An effective method of handling NSF payments in QuickBooks is to use the Bank Register to record the returned check. The method detailed below
First, create a QuickBooks Other Charge Item called Returned Check.
1. From the Lists menu, choose Item List.
2. Click the Item menu button, and choose New.
3. Create a new Item with an appropriate name reflecting a bad check.
4. Click Next
5. Create a second Other Charge item titled "Returned Check Charge" for the service charge you pay your bank, and the expect to recapture customers for bounced checks. Use this item when you re-invoice the customer to recover the service charge.
6. Click OK
You now have the Items necessary to adjust bank account and A/R balances simultaneously for the amount of a bad check; charge the customer for costs related to the bounced check; and re-bill the customer with a QuickBooks Statement.
An entire transaction illustrated:
On February 2nd, an Invoice is created.
On Februrary 7th, payment is tendered.
Third, January 8th, a deposit is made that includes the check from Don Giovanni.
On February 20th, your bank notifies you that your checking account has been charged $135.19, comprising a $15.00 service charge, and $120.19 for the returned check deposited the 17th.
Step 1. Open the checking account register and enter the bank charge of $15.00. It is a good idea to reference the transaction involving the check. In this example, the Invoice number is used in the memo field.
Step 2. Enter the returned check into the register. Use the total amount of the unpaid invoice, in our example, $120.19. Be sure to use the Customer Name as the payee, and Accounts Receivable as the Account.
Step 3. Enter a statement charge for the customer for the amount of the Bank Charge: From the Customers menu, select Enter Statement Charges.
This opens the accounts receivable
register. Select the customer, and enter the Returned check charge
in the register. Note that the Returned check amount of $120.19
already appears. This occurred with the entry made to the
Heritage Bank register above.
Note that the Returned check amount of $120.19 already appears. This occurred with the entry made to the Heritage Bank register above.
Step 4. Create a statement for the
From the Customers Menu, select Create Statements ...
From the Customers Menu, select Create Statements ...
This opens the Create Statements window. Choose the desired
Statement Period. But default, QuickBooks generates statements for
all customers. To create only the statement of a single Customer,
select One Customer and the customer name.
This opens the Create Statements window. Choose the desired Statement Period. But default, QuickBooks generates statements for all customers. To create only the statement of a single Customer, select One Customer and the customer name.
Step 5. Print the Statement. The customer balance now includes the reversal for the returned check, and the returned check charge. The Statement is used to re-bill the customer.
To review the Customer balance, look at the A/R Aging Detail Report, which itemizes the returned payment and its associated service charge.
If the returned check turns out to be the last communication you hear from the customer, refer to our tutorial Recording Bad Debts in QuickBooks (coming soon).