How to handle nsf checks

[Tamitha]

This is my first time. Nice to know this is here. I can't figure out how to do a check if it is returned nsf from a cutomer.

[Joe Williams]

You can use the Help in quickbooks to see how to do this or the following:
Create an Other Charge item titled "Bad Check." In the Amount field, leave a zero amount. From the Tax Code list, choose Non. In the Account field, choose your bank account.
Click Next.
Create a second Other Charge item titled "Bad Chk Chrg" for the service charge you assess customers for bounced checks. Use this item when you reinvoice the customer to recover the service charge.
In the Amount field, leave a zero amount.
Create a new invoice with the amount for the returned check in Bad Check and the bank charge for it on the Bad Chk Chrg item.
From the Tax Code list, choose Non.

In the Account field, choose an income account, such as Returned Check Charges. If the account doesn't exist, set it up now.

[Specialties Inc]

Apart from Joe's suggestion you might want to look at the HELP INDEX [returned cheques].

As I get only about one NFS per year and there is NO bank charge for NFS cheques I get the replacement monies for customer and make an entirely separate deposit for the amount in question with a note on that deposit what it was for. I don't touch the original transaction and I don't enter the replacement $ in QB. It balances my bank acct but don't think an accountant would do it that way. Any comments?

Norbert

[Joey]

As many of my clients file their taxes on the Cash Basis, I prefer a little different method. Link the RetCheck item directly to the Sales Income account instead of the Checking account. The RetCkFee item can be linked to the Bank Service Charges OR the Reimbursed Expenses Income account.
Anyway, when the NSF first bounces, go to Write Checks and create a Debit (in the check number area) non-printed check with a Payee of Returned Check (Other Name) and fill in the amount of the check and I use the Customer's name in the Memo area. Charge this non-check to the Sales Income account in the Expense column below. You will also want to create another one with a Payee of Returned Check Fee for the amount that the bank charged you. This way they will be there to check off when you reconcile. It will also reduce your income for the amount of that check.
Then create a new Invoice for the Customer using the RetCheck item and the RetCkFee item that are linked as we discussed above to the Income Accounts instead of the checking account. When the customer pays you and you Receive Payments for this invoice, it will put the amount back into your income again.
The reasoning for my method is because the invoice linked to the Checking account directly on the Cash Basis Balance Sheet will create an A/R balance on the Cash Basis Balance Sheet which is not correct.

[dskulnik]

Quickbooks is wrong or almost completely wrong with the way to handle bounced check. They do not back out of income the bounced check, they only adjust the bank balance. It could happen that you are a cash taxpayer and pay tax on the income generated from the bounced check. In fact the income or cost of the item may have to be adjusted in the next yr because the NSF check turns out to be a bad debt. The post by JOEY is great and is the only way to handle it.

[Joey]

Just one other note. The two items for RetCheck and RetCheck Fee should be Other Charge type and (NT) not subject to Sales Taxes. That way your Sales Tax calculation is not affected. NSF checks are not subject to sales tax and you don't get any Sales Tax credit when the customer's check is returned. That's why I said to do the Returned Check item for the total amount of the customer's check that bounced.

[kamai]

Thank you Joey for your advice and method in handling NSF checks. My situation is a little different in that the NSF check was for a customer deposit.

So far I've set up the RetCheck and RetCkFee items and recorded the Retuned Check Fee. Now to record the Returned Check, I'm assuming in the expense column I would enter Customer Deposits. Then when I receive the replacement check, I would need to enter another Sales Receipt and Make a Deposit.

Please advise if this is the best way of handling this.

[Joe Williams]

Since Joey is no longer with us, I will answer.
Charge the check to "Returned Check Fee " to the account you used for the customer's deposit in the Expense column below.You will also want to create another one with a Payee of "Returned Check Fee" for the amount that the bank charged you using the Bank Fee expense account.
Then create a new Invoice for the Customer using the RetCheck item and the RetCkFee item . Use teh Receive Payment to show the payment from the customer when you get it.

[wolf]

or you could do it this way through a journal entry:

debit: A/R and customer name the amount of NSF check
debit: bank charges for bank fee
credit: cash bank acct

now you have a very simple reversal of the payment for the invoice and the the A/R is showing the customer owes you a balance and your bank has charged you a fee..

when the customer pays you..do a reverse journal entry
credit: cash bank acct
debit: A/R customer acct for the original amount
debit: bank charge to offset the incurred fee

now your customer balance is zero and you have not incurred any additional sales income that would appear on the P & L if you invoiced the customer for the NSF check and bank fee

[CHill22]

Instead of entering another journal entry, you can simply receive the payment as normal, make the deposit, etc.

[inotrend]

Originally Posted by wolf

or you could do it this way through a journal entry:

debit: A/R and customer name the amount of NSF check
debit: bank charges for bank fee
credit: cash bank acct

now you have a very simple reversal of the payment for the invoice and the the A/R is showing the customer owes you a balance and your bank has charged you a fee..

when the customer pays you..do a reverse journal entry
credit: cash bank acct
debit: A/R customer acct for the original amount
debit: bank charge to offset the incurred fee

now your customer balance is zero and you have not incurred any additional sales income that would appear on the P & L if you invoiced the customer for the NSF check and bank fee

Hi Wolf it seems your way of doing is easy but i have some problems in doing it what is A/R

and when i do it i dont see the figure as outstanding in collections report

Your efforts are much appreciated as i am a non accounting person managing my own company accounts

[homeboy]

There appear to be several ways of handling bad checks depending on whether it's a cash payment, was intended as a deposit, etc. Folks here have suggested ways, some of which don't take into account tax implications, etc. Can somone now offer one universal way for handling bad checks that covers all these bases and takes into account all the objections? Or there is no such animal -- and it's situational?

[bertilak]

Originally Posted by homeboy

Can somone now offer one universal way for handling bad checks ...?

I think the following should work. I had the same question as you (and the OP) and got many conflicting answers, including internal conflicts in QuickBooks' very own help pages. I came up with the following on my own, so here is yet another conflicting answer! (But I like it best). The following is cut-and-pasted from notes I made for myself as I was working on this.

EDIT: Upon re-reading this, it looks very complicated. In reality, it is not. It is just difficult to put things like this into words without getting very verbose!

General Ideas

1. Treat the returned check as a completely new issue, a banking issue. This is opposed to trying to back out or undo previous transactions (invoices, payments, deposits). See "Caveats", below. Instead treat the returned check, the bank fee, the fee charged to the customer, and the customer's eventual re-payment as a separate set of transactions. This is the only way for the QuickBooks record to reflect the actual sequence of events, without having to do an audit.
2. Account for the returned check and the bank fee as expenses that are billable back to the customer. Create a new invoice for these billable expenses instead of re-invoicing the original. Because you use the "billable" feature when recording expenses, QuickBooks will partially automate setting up this new invoice.

Accounts Needed

You will need the following accounts,

1. An expense account for fees charged by the bank. This is where the NSF fee the bank charges will be put. You likely have this account already.
2. An expense account for returned checks. This will probably be new.

These should be marked <Not Tax Related>. EDIT: Maybe this SHOULD be tax related. If you never get a replacement check you want to record a taxable LOSS.

You do NOT need to create any new items. This is because when QB builds the invoice for billable expenses it does not need a new item to do so.

Recording the Returned Check

You will need either two transactions or a single, split, transaction to record the returned check, assuming the bank charges you a fee for this. If you download transactions from the bank, follow their lead – one split or two separate transactions. The two transactions (or splits) represent the returned check itself and the bank fee. Assign the returned check to the (new) “Returned Checks” expense account and the fee to to whatever expense account you use for bank fees. There will be places in the transaction(s) for filling in this info.

KEY POINT: Be sure include the Customer:job (include :job if you can definitely relate the intended payment to a specific :job). Check the "billable" box on both of these.

Invoice the Customer

When you create the invoice, QuickBooks will recognize that there are outstanding billable expenses for this customer and ask if you want to add that them to the invoice. Select "OK" and then check off the two charges to bill them back to the customer. The invoice is now complete, unless you want to add an additional late fee charge above and beyond recovery of the bank's fee.

Now create a customer statement that shows the new invoice. Send the invoice and the statement to the customer. I believe the invoice and statement will be very clear and understandable, especially when compared to other techniques I experimented with. In any case, Be sure to include an explanation and say that a replacement check is required and it needs to include an extra amount to cover the bank's charge.

Recording the Replacement Check

Nothing special is required. "Receive Payments" from the customer and apply the payment to the invoice. Then deposit the check and hope the same thing doesn't happen all over again!

Summary of key points

• Use expense accounts to record returned checks and associated bank fees. Don't try to credit or debit things directly back to Accounts Receivable.
• Use the "billable" feature when recording the transaction(s) from the bank that represent the returned check.
• Do not undo nor delete any existing transactions. You need to keep them to be historically accurate and to match bank statements when reconciling.

Caveats

Do not take the approach of backing out some or all activities that lead up to the returned check. This gets very complicated very quickly. If done wrong, this could mess up things like inventory, cost of goods sold and other things. Also, you are probably not going to get back whatever product or service was delivered. You can't back things out in the real world as easily as you can back out the records of them in QuickBooks. So there really may be no right way to do this.

Another complication is that the returned check may not be specific to any single invoice. Sometimes a customer makes partial payments, or larger payments covering several invoices, some of which may have been partially paid already and some of which may remain partially paid. Again, there is probably no right way.

Final Word

What I outlined above is new to me and I have only used it once. I would appreciate any comments or criticisms. Areas I wonder about:

• Is the above consistent with common accounting principles and procedures?
• Are there simpler ways to do the job that don't trip over any of the caveats I list?
• Does the above create any problems in QuickBooks I haven't discovered? In other words, are there Caveats I have missed?

[Deidre56]

So what inventory items are you going to use on the new invoice? also, NSF checks are not expenses.

[bertilak]

Originally Posted by Deidre56

So what inventory items are you going to use on the new invoice? also, NSF checks are not expenses.

You don't need inventory items on the new invoice. QB creates the invoice for you w/o any items. Well, it does create a dummy item called "reimb group". See attached.

Capture1.png is the downloaded transaction from my bank for the NSF check. I filled in the accounts, the customer, and originally put check marks in the billable column. These have now been changed to icons indicating that they have been invoiced. If I use other than an expense account, QB does not allow me to put a check mark in the billable column. I believe QB is trying to tell me something here!

Capture2.png is the invoice. Once I selected the customer, QB did most of the rest for me. I just had to tell it to apply outstanding charges and it filled in the rest.

Capture3.png is what a statement looks like.

Whether checks are an expense or not is an open question. For me, things work best when thought of that way. None of the above work if the returned check is other than an expense. Note that the expense account for "Returned Checks" is back to a balance of zero once the invoice is created, which one would do immediately.