How to Record a Returned Check and Its Fee

To record a returned check from a customer, reverse the original deposit by moving the amount from the bank account back to accounts receivable, reopening the customer's invoice. Code the bank's returned item fee to bank charges. Then tell the client the invoice is unpaid again so they can collect the money and decide whether to pass the fee on.

What a returned check looks like on a bank statement

A returned check shows up as two or three separate lines on the client's statement. First comes the original deposit, then a few days later a withdrawal of the same amount labeled "RETURNED ITEM", "RETURN DEPOSITED ITEM" or "NSF", and often a separate fee line. The withdrawal and fee may fall in the next month's statement.

The example below shows a typical sequence. All names, dates and amounts are illustrative.

The June 3 deposit was a customer's payment of invoice 1088. It bounced on June 7, the bank charged a 15.00 fee, and on June 21 the customer paid again by a new check covering the invoice plus the fee.

Read the deposit and the return as a pair. The amounts match exactly and the check number usually appears on both, which makes them easy to link even when they land in different months.

Reversing the returned check deposit against receivables

The reversal takes the returned amount out of the bank account and puts it back on the customer's balance. Credit the bank for the returned amount and debit accounts receivable with the customer named. The invoice the check had paid is open again, which is exactly the client's real position.

Coding the return to an expense, such as bad debt, is the common shortcut and the wrong one at this stage. The customer still owes the money. Bad debt is a later decision, made only if collection fails.

Intuit's help article on recording a bounced customer check with a journal entry in QuickBooks Online follows the same logic. It debits accounts receivable with the customer's name, credits the bank account, and then links the bounced payment to that entry in place of the invoice it had paid. Other accounting systems have their own screens, but the two lines are the same.

For the worked example, the entries are:

1. June 3: the deposit, already recorded as payment of invoice 1088. Debit bank 1,850.00, credit receivables 1,850.00.
2. June 7, return: debit receivables 1,850.00 (customer named), credit bank 1,850.00.
3. June 7, fee: debit bank charges 15.00, credit bank 15.00.
4. June 21: the new deposit of 1,865.00, applied to invoice 1088 (1,850.00) and to a fee invoice (15.00) if the client chose to bill it.

Where does the returned check fee belong?

The bank's returned check fee belongs in bank charges, the same expense account as other service fees on the statement. It is a cost the client paid. If the client decides to pass the fee on to the customer, that is a separate invoice line coded to income, not a reduction of the bank charge.

Keeping the two apart makes each one visible. The bank charges account shows what returned checks cost the business over a year. The fee income account, or a line in other income, shows how much of that was recovered. Netting them hides both numbers.

A client may also have fees that look similar but are not returned check fees. The bank might charge a fee for a deposited item that was a duplicate, or a monthly service fee on the same day. Code each to its own description, so the rule for "RETURNED ITEM FEE" stays clean. A fee on a reimbursement check the client issued to staff is the client's own cost; recording employee expense reimbursements covers how those payments flow.

Reopening the invoice and noting the returned check for collection

Once the entry is posted, the invoice shows as unpaid, but the client may not know. Send a short note the same week, so they can contact the customer while the payment is fresh. A returned check discovered in a monthly close can be three or four weeks old already.

A note template that works:

A check from Example Customer for 1,850.00, deposited June 3 for invoice 1088, was returned by the bank on June 7. The bank charged a 15.00 fee. The invoice is open again. Would you like to bill the 15.00 fee to the customer, and should we watch for a replacement payment?

Keep a list of returned checks per client with the date, the customer, the amount and the status. Two returns from the same customer in a year is a pattern the client should hear about. Chasing customer payments is outside most bookkeeping engagements, so if a client asks you to do it, agree the price first; value pricing for bookkeepers is one way to fold that kind of request into a package.

When a returned check is the client's own check bouncing?

When the client's own check bounces, the bank does not pay the vendor, and any amount it took from the account comes back. Undo the payment so the bill is unpaid again, book any fee the bank charges the client, and warn the client right away. The vendor will want paying, and may add its own fee.

On the statement, this looks like a check clearing and then a credit returning the same amount, often with an overdraft or insufficient funds fee. In some cases the bank refuses the check without posting it at all, and only the fee appears.

The entry mirrors the customer case. Debit the bank for the returned amount and credit accounts payable with the vendor named, so the bill shows as unpaid. If the check paid an expense directly, such as a software plan, credit that expense instead, and recode it when the replacement payment clears. Vendors billed on autopay may also suspend service after a failed payment; categorizing software subscriptions is a good place to check which plans renew from which account.

In AutoBankConvert, a returned item line that the client's rules do not recognize goes to the review queue with a suggested category instead of being coded on a guess, and a statement whose return or fee line went missing would fail its balance check rather than be exported.