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NSF Checks in QuickBooks

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.

 Part A: Common Errors

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.

customer payment 

Unapply Payment 

At first glance, Un-Apply Payment seems to work: The subject Invoice is no longer marked PAID.

invoice upaid

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.

Customer Center

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/R Report

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:

So. How to handle the problem?

Part B: Setting Up Necessary QuickBooks Items

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.

List Menu ... Item List

2.     Click the Item menu button, and choose New.

New Item

3.    Create a new Item with an appropriate name reflecting a bad check.

New Item

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.

New Item

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.

Part C: Recording an NSF Check in QuickBooks

An entire transaction illustrated:

On February 2nd, an Invoice is created.

Invoice

On Februrary 7th, payment is tendered.

Customer Payment

Third, January 8th, a deposit is made that includes the check from Don Giovanni.

Select Deposits

Deposit Ticket

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.

Bank Register for Service Charge

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.

Record NSF to Bank Register

Step 3. Enter a statement charge for the customer for the amount of the Bank Charge: From the Customers menu, select Enter Statement Charges.

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.

Enter Statement Charge

Step 4. Create a statement for the customer.

From the Customers Menu, select Create Statements ...   

Create Statement

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.

Create Statement Form

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.

Customer Statement with returned check

Customer Statement totals

To review the Customer balance, look at the A/R Aging Detail Report, which itemizes the returned payment and its associated service charge.

A/R Schedule

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).


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