Causes of Bounced Checks in QuickBooks: A Comprehensive Guide

Non-Sufficient Funds (NSF) checks or returned checks are actually bounced checks. This is a harsh experience faced by most businesses. Not only will a returned check of yours have an effect on your cash flow but also there will be bank charges from the broken check and Additional administrative effort will be required to fix it. In businesses that use QuickBooks as bookkeeping software, it is important to understand why the checks bounce, how they can be properly recorded as well as managed in QuickBooks in order to have proper financial records and good cash management. This article is going to explore the most typical causes of check bounces, step by step instructions on how to deal with a bounced check in QuickBooks Desktop and Online, and advice on how to pursue and counter its effects.

Common Causes of Checks Bounced

Malice is only one factor among several that might cause a check to bounce. Knowledge of the root of the problem might sometimes guide you in the process of dealing with the issue with the person who issued the check. The most common reasons are the following:

1. Malice is only one factor among several that might cause a check to bounce. Knowledge of the root of the problem might sometimes guide you in the process of dealing with the issue with the person who issued the check. The most common reasons are the following:
   • This is definitely the most common one. The issuer of the check just did not get the money in his account to do what he could when the check was presented to him. This may occur because of multiple reason:

• Ineffective cash management of the party that pays
  • They might have made wrong calculations regarding the balance they had.
• Timing issues
  • The money can still be deposited still in the course of being cleared at the time of presenting the check.
• Unexpected withdrawals
  • There can be other debits to the account of the payer which could have made their balance lower than the amount in check.

2. Account Closed: The account in which the check was drawn has been closed by the bank. This could be because of the payer changing banks or even closing an existing account or even the bank closing the account because of inactivity or any other reason.

3. Stop Payment Order: The person or company that presents the check has told his or her bank to stop the check. This usually happens when they suspect that there was a mishap in making the payment, or there is a disagreement with your business or when the check went missing or stolen.

4. Signature Mismatch/Missing Signature: The check has a different signature to that which is in file with the bank, or the signature is not present on the check at all. To avoid fraud, it is a stipulated requirement in banks that they must verify signatures.

5. Post-Dated Check: Your bank has attempted to deposit the cheque prior to the date on which it is dated. Whereas in some banks the post-dated checks may be processed, the same will be returned in other banks.

6. Stale-Dated Check: The bank will not honor the cheque if it is old, usually over the age of six months.  Banks typically generate a policy about the maximum length a bank will cash a check after it has been issued.

7. Fraudulent Check: The cheque is either fake or falsified. This is a more serious matter and in most cases reports have to be made to authorities.

8. Account Frozen: The bank has frozen the account of the check issuer since there is a case against the issuer on legal grounds, possible fraud or other financial problems.

9. Incorrect/Missing Endorsement: Let us say that your business is cashing a check that is written to somebody and endorsed over to you, a missing or incorrect endorsement will cause the check to bounce.

10. Damaged Check: The check has been torn and is either illegible or otherwise damaged and the information cannot be interpreted correctly by the processing equipment of the bank.

Things to Know While Recording a Returned or Bounced Check in QuickBooks

It is necessary to know the financial consequences and significant accounts involved in the case of bounced checks in QuickBooks before plunging into the procedures.

Undeposited Funds: When you first entered the payment into QuickBooks it was probably entered into the dollar account called “Undeposited Funds” but has not yet been deposited to your bank account. This entry must be reversed when the bouncing of the check occurs.

Accounts receivable (A/R): The check that was returned is an indication that your customer is yet to pay. You will be forced to re-add the remaining balance on their A/R.

Bank Service Charges Cost: Your bank will most assuredly make you pay a fee on the bounced check. This is to be charged as cost.

Customer Charges/Fees: Due to the rejected check, you may additionally decide to charge your customer a fee. This will raise their outstanding balance thereby covering your bank charges.

Journal Entries: You may use journal entries to properly reflect the changes in more detailed situations or in QuickBooks Desktop.

Impact on Reconciliation: Your bank reconciliation will be troubled by bounced checks. The deposit will be shown and returned check will be shown as a cash debit.

Record Bounced or Returned Checks in QuickBooks Desktop

Recording a bounced check in QB desktop does take a series of steps to properly correct the original payment and include any fee associated with the check.

Method 1: Document bounced checks (ideally, payments from customers)

There is also an inbuilt option in QuickBooks desktop to deal with bounced checks, and this makes it easier when it comes to paying the customer.

Customer Payment: Open Receive Payments in Customers. Look for and obtain the original payment that had the fraudulent check in it.

Click the “Record Bounced Check” Icon: When you bring up the window of the “Receive Payments”, there is an icon at the top, usually a check with an arrow or a Bounced Check button. Press on it.

Enter Bounced Check Information:

• Transaction Date: Transaction date: fill in the date already given by the bank concerning the bounced check.
• Bank Fee: Provide the fee that was charged on you due to the bounced check by the bank.
• Customer Fee: Leave any fee you are going to charge your customer.
• Account for Bank Fee: Choose the right expense account (e.g. Bank Service Charges, Bounced Check Fees).
• Account for Customer Fee: Customer Fee accounts: QuickBooks defaults to an income account. It is possible to establish special Bounced Check Income account or NSF Fee Income account.

Automatically, in QuickBooks:

• Insert a journal entry in case they want to reverse the initial payment, and add more credit to the customer.
• Write down the bank fee as an expense.
• An invoice should be issued to the customer under the customer fee.
• Write in the original payment a memo to the effect it has bounced.

Close and Save:

Method 2: Manual Adjustment (In the Event that the Bounced Check Entry Feature is neither appropriate nor Desirable)

You can use this when the bounced check was not a customer payment or when you want to have the option of manipulating the process manually.

Create a New Service Item for NSF Fees (Optional but Recommended)

• See Lists > Item List.
• Item > New.
• Choose the type as Select Service.
• Call it what you want, such as, NSF Fee or Bounced Check Charge.
• Link it to an income account (e.g. “Bounced Check Income”, or “Other Income”).

Enter a Negative Payment:

• Make your way to Customers>Create Credit Memos/Refunds.
• Choose the customer.
• The initial line is to be enclosed with the original invoice (in case), and the amount of bounced check should be entered as negative in the amount column.
• When you are charging a customer fee, create another line item and add the line item you have created earlier with the name of the “NSF Fee” service item.

Note: You do not want a refund, but rather this should add to their outstanding. In the future, you will most probably have to make use of the functionality of “Apply Credit against Invoice”.

Instead, you could issue a second invoice in relation to the bounced amount + fees:

• Click on customers > Create Invoices.
• Choose the customer.
• Enter a line entry of the check that bounced, and possibly use a service (linked to your Accounts Receivable) that connects to your Accounts Receivable or reversing an original entry.
• Enter another line corresponding to your NSF fee, and the item in the service list should be the NSF Fee.

Record the Bank Service Charge:

• In banking, click on Write Checks or Enter Credit Card Charges (in case it was on a credit card).
• Payee: Your Bank.
• Account: Pick your bank account.
• Date: Date of fee application.
• Amount: Put in the amount of bank fee.
• Expenses Tab: You should choose your expense account in the case of your Bank Service Charges.
• Memo- NSF Deposit check-[Customer Name].
• Save, Close.

Match During Bank Reconciliation

Make sure that you appropriately match the negative payment/new invoice with the bank service charge to make your bank reconciliation complete.

Steps to Record Returned or Bounced Checks in QuickBooks Online

There is also an easier way to cater to bounced checks of the customers, as provided by QuickBooks Online.

Method 1: It is preferred to use the “Record Bounced Check” feature for customer payments.

Locate the Original Payment:

• Access > Sales > Customers.
• Following the customer’s identity being verified using the returned check.
• Their transactions can be seen by clicking on their name.
• Find the original invoice of payment entry. It will normally be categorized as a Payment.
• Or, on Bookkeeping > Transactions > Bank Transactions, select the original deposit and click on it.

Record the Bounced Check:

• After opening the payment, there should be a button or a link with the text Record bounced check, or Mark as bounced. Particularly, these are the words in your QBO version (the name sometimes differs depending on the version you use).
• Tap on this choice.

Enter Details:

• Date: Enter the day the bank notified you that the cheque had bounced.
• Bank Fees: Fill the sum your bank charged you.
• Customer Fee: Type in any cost you want to impose to your customer.
• Make estimates of Bank Fees: Verify the charge account (e.g., Bank Charges, NSF Fees).
• Account for Customer Fee: Clarify the income account (e.g, Other Income, NSF Fees).

Confirm and Save: QuickBooks Online will automatically:

• Kindly reverse the first payment so that the invoice or (sales receipt) that it corresponds to can become available for the new payment.
• An expense transaction (bank fee) should be created.
• Make a fresh invoice about customer fee (if you have them), and this will add to the outstanding amount of the customer.
• Include a memo on the initial payment.

Save and Close.

Method 2: Manual Adjustment (If “Record Bounced Check” isn’t available or for other scenarios)

This option is handy in the case that the bounced check was not directly related to a customer payment or when you want greater control.

Create an NSF Fee Service Item (Optional but Recommended)

• Click the Gear Icon in QuickBooks and click All Lists then Products and Services.
• New > Service.
• Name: “Bounced Check Charge” or NSF Fee”.
• Income Account: Create a new income account such as Bounced Check Income or Other Income.
• Save and Close.

Reverse the Original Payment (Option A: Create a Credit Memo and Apply):

• Navigate to + New > Credit Memo from the ribbon toolbar drawers.
• Choose the customer.
• Input the original services/ products items and their negative value equal bounced check value.
• Save Credit Memo.
• Access Receive Payment+ New.
• Choose the customer.
• You should then select the absolute invoice and the credit memo and reckon the credit invoice to the invoice and this will effectively cancel out the payment of the absolute invoice.

Reverse the Original Payment (Option B: Create a Journal Entry):

• Put in + New > Journal Entry.
• Date: The date at which the check bounced.
• Line 1: Write to Debit Accounts Receivable in the amount of the check bounced. This (re-opens the balance of the customer).
• Line 2: Write credit against the Undeposited Funds (or the bank account that you did deposit directly) the amount of the bounced check with.
• A/R line (Name): Click on the name of the customer.
• Save and Close.

Initiate an Invoice to Customer (bounced amount + your fee)

• Access the menu as + New > Invoice.
• Choose the customer.
• Add the entry line the original cancelled cheque amount of service/product.
• Include another line item of your service item called “NSF Fee” (in case you have this one).
• Save and send (or Save and close).

Record the Bank Service Charge:

• Click Go to+ New > Expense.
• Payee: The bank.
• Bank Account: This is account that is affected in the bank.
• Payment Date: The date in which the fee was incurred.
• Category: You should choose your bank charges or bank service charges expense account.
• Price: Send the bank fee.
• Memo: “NSF check NSF fee [Customer Name].”
• Save and Close.

Match During Bank Reconciliation

• Make sure that all these transactions get properly matched when you are reconciling with your bank.

How to Record a Non-Sufficient Funds Check in QuickBooks Desktop?

Comprehensively as explained above, as a preferred way of recording an NSF check in QuickBooks Desktop to make a payment to a customer, we can utilize the inbuilt option labeled as (Record Bounced Check). This is sufficient to reverse the original payment, recalculate the outstanding balance of the customer, makes an entry on the bank fee cost as an expense and creates an invoice on the fee which you may want to charge to the customer.

And, unless it represented a customer payment such as a so-called NSF check (a check you received as a refund by a vendor and which bounced), you would normally do this by the manual method of either journal entries or by posting a credit memo/bill that would reverse the original entry before recording the related bank charges as an expense.

Apply Bank Fees to a Bounced Check in QuickBooks Online & Desktop

Charging of bank fees on the part of bounced checks is part and parcel of the bounced checks management process.

In QuickBooks Desktop:

• In the case of the feature of recording of a bounced check, the Bank Fee will also be recorded directly as prompted by the feature. QuickBooks will automatically post an expense transaction under the account of Bank Service charges (or other account that you might select).
• In the case of a manual entry, you would enter a transaction called Write checks or Enter Credit Card Charges and put the amount in your bank service charges expense account.

In QuickBooks Online:

• Whenever the functionality is put to use, i.e. when you record a bounced check, you will enter the amount of the bank fees in the specified field. QBO automatically makes an expense transaction of this.
• In case you are recording it manually, you would enter a new transaction as an expense and use your bank account and allocate the value to your bank charges or bank service charges expense account.

Note: To fully carry the cost of a bounced check to an appropriate account, always make sure you have the bank fee classified to the right expense account.

Delete a Bounced Check Transaction in QuickBooks Online or Desktop

As a rule, one is not advised to remove bounced checks transactions particularly after they have been reconciled. Your audit trail and reconciliation can be messed up by deleting. Rather, voiding or pushing them back is preferable in an event of an error.

But in case you really need to delete a transaction (e.g. it was done in error and has not figured in other transactions or you have not reconciled it):

In QuickBooks Desktop:

• Find Transaction
  • Open the register of the bank account, or locate the particular payment/deposit.
• Right> click > Delete
  • Carefully, right-click the transaction and choose the delete option from the menu. Ask the deletion to be confirmed.
• Undo Bounced Check Action
  • You would have to revert to the initial payment and then you may have a choice of un-bouncing check or you would have to manually undo (rollback) the entries that it made (journal entry and customer invoice of charge). Be careful as it’s tricky.

In QuickBooks Online:

• Look up the Transaction
  • Open the screen “Transactions” (e.g. Sales > All Sales, or Bookkeeping > Transactions > Bank Transactions). Locate the particular payment, deposit or cost associated with the bad check.
• Transaction Open
  • Go through transactions by clicking on the transaction.
• Delete > More
  • Open the bottom of the transaction screen to the “More” button (which usually consists of three dots) and choose Delete. Remove confirmation.
• Undo Bounced Check Action
  • Just like Desktop, in case you entered data via the “Record bounced check” option, you will have to manually delete the subsequent transactions that it has created (the expense of the bank fee, the invoice of the customer fee), otherwise the reversal of the initial payment in mid-transit will not be reversed automatically. It would have to revert back to the initial payment and un-mark the fact that it was a bounced payment manually should such a procedure be possible, or reverse it manually.

How to Reverse a Bounced Check in QuickBooks?

The occurrence of bouncing back of a check simply entails the reversing of the original bounced check entry. This may have to be when:

• That was a mistake of the bank and the check was not bad.
• There is a successful re-deposit of the check by the customer.
• You have missed even writing the bounced check.

Reversing a Bounced Check Action (QuickBooks Desktop – if the “Record Bounced Check” feature was used):

This is not as straight as writing it down. Undo Bounced Check is not an explicit button in QuickBooks Desktop once the action is done. You would usually require to:

• Find Journal Entry: The feature of Record Bounced Check makes a journal entry sign reversing the initial repayment. This journal entry in QuickBooks may be found (Reports > Accountant & Taxes > Journal).
• Delete/ Void Journal Entry: This journal entry can be ceased or cancelled.
• Reverse the Customer Invoice for the Fee: In case you had created an invoice detailing the fee paid on the customer account, then you would have to void or delete such an invoice.
• Reverse Bank Fee Expense: Find bank fee costing transaction and either delete or void it.
• Re-apply the Original Payment: Head to the original payment and make sure that it is applied properly to the invoice or record the payment again in case it was 100 percent reversed.

Reversing a Bounced Check Action (QuickBooks Online – if the “Record bounced check” feature was used):

Like Desktop, an immediacy undo button does not exist. You would have to:

Locate and Delete/Void Related Transactions

• Locate and void/ delete the expense done to the bank fee.
• Delete/void the invoice that is going to be created in the customer fee.

Re-link the Original Payment to the Invoice

The original Record bounced check act does decently unlinking of payment against the invoice. You will have to revert to the sales transaction made by the customer, locate the payment made and apply it back to the particular invoice. In case the invoice had been marked as “Paid” before, you may be required to change either the invoice or post a new payment so that it gets covered.

Adjust Bank Reconciliation

Make your bank reconciliation to show corrected status of the deposit.

Manual Reversal (If you recorded manually, or if the above is too complex)

In both Desktop and Online, in case you had made the entries yourself (manually,y e.g., by journal entries), you would in effect make the reverse entries to remove them. For example:

• In order to reverse a cost on a bank fee, generate a deposit to that bank fee account (or a negative cost).
• To reverse the re-opening of A/R, a credit memo or a new payment should be generated to refer to the now open invoice.

Recommendation: In case of complex reversals, particularly when there has been reconciliation of transactions, it will be highly advisable to call a QuickBooks ProAdvisor or an accountant so that no other mistake is created.

Track Bounced Checks in QuickBooks Reports

The proper observation of bounced checks is very important in maintaining your cash flow and getting difficult customers. In QuickBooks, we have reports that can help for sure.

Accounts Receivable (A/R) Reports:

• AR Aging/Summary: Once the bounced check is entered, the amount will be displayed under the customer balance. Such reports will make you aware of those customers who are indebted to you and through what duration. This is your main reference point in tracing those who are yet to pay you back on a bounced check.
• Open Invoices: All unpaid bills will also be listed in this report as well as those that may have been paid already through a check that is later on bounced.

Customer Balance Reports:

• Total Customer Summary/Detail: Just as with the A/R reports, they give you a running total on what every customer owes the company.

General Ledger/Journal Reports:

• Journal Report: This report can be subjected to filtering in terms of the period of time in which the bounced check was registered. If ever you would use the Bounced Check Feature, you would see the journal entry created by that feature. This gives an elaborate audit trail.
• Transaction Detail by Account: All you have to do is to run this report on your Undeposited Funds or bank account and search after the certain deposit and following deposits related to the bounced check.

Profit & Loss (P&L) Report:

• Bank Service Fee/NSF Fees: This report will indicate how much you have been charged in bank fees because of bounced checks, so that you can understand to your financial disadvantage.
• Other Income/ Closed Checks Income: In case, you Charge your customers on bounced checks, it will be recorded under your income accounts.

Customer Statements:

Issuing customer statements will demonstrate to the customer the amount he/she owes you, which is the amount on the invoice that he/she has not paid but re-opened because of check bounced plus any NSF fee added to the amount that you charged him/her. This serves as a reminder and an official call for payment.

Tips for Tracking:

• Use Memos/Notes
  • In entering checks that bounce, put a clear memo or note on the transaction to denote that it was a bounced check, the check number, and any reason known.
• Desktop Custom Fields
  • With QuickBooks Desktop 2024, you might even be able to set up custom fields on your customers and flag them as needing a history of bounced checks.
• Tags (Online)
  • QuickBooks Online gives you an option to tag customers with bounced checks with a special tag called QuickBooks tags to search out such customers easily the next time you need to make a deal with them.
• Communicate with Customers
  • Contact promptly those customers whose checks have bounced. Proper communication may assist in solving the situation in a short period and keep the relationship with the customer good.

Conclusion

Bounced checks are not only an annoyance, but they can seriously affect cash flow and financial precision of a business. Businesses may efficiently handle the occurrence of these events since they can know the most frequent causes and take proper and careful measures to address the issue correctly by going through the proper procedures in QuickBooks Desktop and online. The use of the in-built features of the record of bounced check, recording bank fees and customer charges as correctly and using the reporting capabilities of QuickBooks must be employed. Immediately, dealing with bounced checks will result in proper Accounts Receivable records which reflect what is owed to you and hope to keep you with good financial records so that you can make informed business decisions.

Frequently Asked Questions