Review / tutorial
NSF Check: Meaning, Bank Reconciliation and Journal Entry
An NSF check is a check returned for nonsufficient funds in the payer’s account. When your deposited customer check is returned after you recorded its receipt, reduce book cash and normally restore the customer receivable. Record any actual bank fee separately. It is not an ordinary outstanding-check timing difference.
A worked example
Birch Repair: receipt, return and fee
Fictional educational example. Amounts are illustrative, not customer records.
| Stage / source | Cash movement | Book cash after posting | Customer receivable | Entry or control |
|---|---|---|---|---|
| Opening | None | $2,000 | $400 | Invoice BR-18 already recorded |
| Oct 20 / DEP-018 | +$400 | $2,400 | $0 | Dr Cash $400; Cr Receivables $400 |
| Oct 28 / RET-018 | -$400 | $2,000 | $400 | Dr Receivables $400; Cr Cash $400 |
| Oct 28 / fee row | -$10 | $1,990 | $400 | Dr Bank fee expense $10; Cr Cash $10 |
| Reconciliation at cutoff | $2,400 - $400 - $10 | $1,990 | $400 | Bank $1,990 = adjusted books $1,990 |
| Later replacement payment, if received | +$400 | $2,390 | $0 | Dr Cash $400; Cr Receivables $400; no new revenue |
The replacement payment is after the cutoff and assumes no other activity.
If the return is already in the bank statement, do not deduct it a second time on the bank side.
The restored receivable is the original $400 debt; any recoverable customer fee requires separate support.
Step by step.
Confirm the returned item
Match the bank return notice to the original deposit, customer, invoice and amount. Confirm the return reason rather than inferring it from a short descriptor.
Reverse the failed collection
If the original receipt reduced a receivable and has not already been reversed, debit that customer’s receivable and credit Cash for the returned amount.
Record and reconcile the fee separately
Post only a fee actually charged and supported by the statement. Reconcile the updated cash balance and track any later replacement payment separately.
The deposited customer check example
Fictional Birch Repair starts with Cash $2,000 and an existing $400 receivable for invoice BR-18. On October 20 it deposits customer check C-018: debit Cash $400 and credit Accounts receivable $400. The books now show Cash $2,400 and that invoice paid.
On October 28 the bank returns the same check for insufficient funds and removes $400. In this illustration only, the bank also charges a separate $10 fee. The statement ends at $1,990: $2,000 + $400 - $400 - $10. Fee amounts and policies differ; $10 is an invented teaching amount, not a promised or standard bank charge.
Restore the receivable and reduce book cash
Assuming no other entries have been recorded, post debit Accounts receivable, BR-18 $400 and credit Cash $400, referencing return notice RET-018 and original deposit DEP-018. Then post debit Bank fee expense $10 and credit Cash $10, referencing the actual fee row.
Cash falls from $2,400 to $1,990, and the customer once again owes the original $400. The $400 return does not erase revenue earned on the original service and is not automatically bad-debt expense. Whether an amount is collectible or should be written off is a separate supported decision.
Put the return on the correct reconciliation side
If the bank statement already includes the return and fee but the cash ledger does not, subtract $400 and $10 on the book-side reconciliation. Adjusted books are $1,990, equal to the $1,990 bank balance when there are no other differences. Do not subtract the return again from the bank balance.
If a bank feed or another user has already recorded the reversal, verify its customer, date and accounts before adding anything. A second reversal would understate cash and overstate the receivable. Preserve the original receipt and its reversal rather than deleting the history to make the balance look right.
NSF returns are different from outstanding checks
An outstanding check is usually your own payment already deducted in your books but not yet paid by the bank at cutoff. It is a timing item on the bank side. Here, your customer’s deposited check failed and the bank has already reversed it, so your books need a correction if they still show a successful collection.
Not every returned check is NSF: stop-payment instructions, closed accounts, fraud or technical issues can produce returns. The CFPB explains that even funds made available from a deposited fraudulent check can later be taken back. Availability is not proof of final payment, and a return descriptor alone does not establish fraud.
Follow the replacement payment without adding revenue again
If Birch later receives and verifies a $400 replacement payment, debit Cash $400 and credit the restored receivable $400. The customer balance returns to zero. Do not credit service revenue a second time for collecting an existing debt.
Charging the customer an extra returned-payment fee depends on the agreement and applicable rules; this guide makes no legal collection recommendation. Fulla can help extract the statement rows for review, but it does not decide whether to reverse a receipt, assess a fee, collect a debt or post accounting entries.
Sources and documentation
- OpenStax: bank reconciliation and associated journal entries(opens in a new tab)
- CFPB: deposited fraudulent checks can be reversed after funds become available(opens in a new tab)
Follow the source links for original definitions and current product requirements.
Questions about this guide
Is an NSF check added or subtracted in bank reconciliation?
When the bank has removed a deposited customer check but the books still include it, subtract the returned amount from book cash and restore the receivable if appropriate. Do not also subtract an already-posted return from the bank side.
Do I charge the customer the bank fee?
Not automatically. The bank fee and any amount recoverable from the customer are separate issues. Record the actual bank charge, then assess any customer charge using the agreement and applicable requirements.