A check (also known as a cheque) is a document that allows an account holder to pay someone. Essentially, it orders the bank to pay that person a specific amount.
Usually, the check includes spaces for the account holder to include the details of the underlying payment. These details include the receiver’s name, the amount, the date of issue, etc.
Checks have been one of the most common sources of payment for companies. Although better and more efficient systems have taken over the process, companies still use them.
Usually, these involve two parties. The first is the payor who issues the check. On the other hand, it also includes the payee who receives that check. Either of these parties can be an individual or any other entity.
Checks can come in different forms and types. Usually, these types have specific features. However, the underlying function often remains the same.
Some people may confuse NSF checks as a type of check. However, it is not the same. The accounting for NSF checks also differs from other types. Therefore, it is crucial to study what these are.
What is an NSF Check?
An NSF (non-sufficient funds) check represents the status of a checking account. It is a check that a payee presents to the bank. However, the bank does not honor that check. As the name suggests, the reason for not doing so is straightforward.
The payee’s account does not have enough funds to process the payment. Therefore, the bank denies paying the payee at that time.
An NSF check does not imply a wrongful intention from the payer. Usually, people assume the payer provides the check, although they may know they don’t have enough funds. However, an NSF check may become NSF for other reasons as well.
One of the most common reasons among these includes a timing difference. This difference occurs between the issue and the presentation of the check.
In some cases, an NSF check may also involve a fee. This fee applies to the payer who presents the check to the bank. The account holder may also incur a fee for that fee.
In some cases, the bank may also honor the check despite the account not having sufficient funds. However, it charges that amount as an overdraft to the customer’s account.
Overall, an NSF check represents a check presented to the bank that gets dishonored. It occurs when a payer does not have sufficient funds in their account to process the payment.
The NSF check may also come with charges to the payer and the payee. Several reasons may exist as to why checks become NSF. Nonetheless, it is crucial to understand how to treat them in accounting.
What is the accounting treatment of an NSF Check?
The accounting treatment of an NSF check is straightforward. However, it is crucial to understand how companies record checks received from customers.
Usually, once a company gets a check from a customer, it must recognize it in the accounting records. This treatment is in line with the prudence concept in accounting. Companies account for checks as soon as they receive them from a customer.
When companies receive a check, they must deduct the amount from the accounts receivable balance. However, it is not mandatory to process the check to do so.
Instead, companies may present that check to the bank after a long period. In accounting, the time the check gets received is the period companies must record it. It does not require companies to receive the funds to their accounts to account for them.
Once companies present the check to the bank, they will receive cash to their accounts. In some cases, they can also get paid at that spot. However, the same does not apply to NSF checks. In this case, the bank will deny payment to the company.
It occurs because the customer’s bank account does not have enough funds to process that request. The issue occurs since companies have already recorded that amount as a receipt from the customer.
On top of that, the bank may also charge a fee for the check presented. The company must pay that fee at the time. However, since it does not relate to the company, it will charge that amount to the customer.
This amount is a part of the accounting for NSF checks. Later, the company will receive the receivable amount with the charge paid to the bank. Consequently, the customer bears the fee for the NSF check.
The accounting for NSF checks occurs separately. It entails reversing the first entry record when a check gets received. Similarly, it impacts two accounts. The first is the bank account where a company has already recorded a receipt.
The other account is the customer’s account that the company has decreased due to that receipt. On top of that, it also involves an additional charge which is the NSF fee paid to the bank.
What are the journal entries for an NSF Check?
The journal entries for an NSF check are straightforward after understanding how to account for it. As mentioned above, it involves two accounts.
These include the accounts receivable and bank accounts. Companies must also identify the specific customer to whom that balance relates. This way, they can increase that customer’s balance specifically.
The journal entries for an NSF check also involve charging the NSF fee paid to the bank. However, it does not go into an expense account. Since the company does not bear that amount, it cannot record it as a cost for that period.
Instead, it increases the customer balance receivable on the balance sheet. If the bank does not charge an NSF check fee, this step will not apply.
Overall, when a company receives a check from a customer, it records it as follows.
| Date | Particulars | Dr | Cr |
| Bank/Cash | XXXX | ||
| Accounts receivable | XXXX |
However, the NSF check requires a reverse of that entry. Therefore, the journal entries for an NSF check will be as follows.
| Date | Particulars | Dr | Cr |
| Accounts receivable | XXXX | ||
| Bank/Cash | XXXX |
Essentially, the above journal entry increases the customer balance to the previous amount. However, the above double-entry assumes the customer increases that balance by the same amount. If the company pays an NSF fee to the bank, the accounting will also include that amount. Usually, it occurs with the same accounting entries.
Example
A company, ABC Co., has an accounts receivable balance of $5,000 from a customer. During the period, it receives a check from that customer. ABC Co. records that receipt using the following journal entries.
| Date | Particulars | Dr | Cr |
| Bank | $5,000 | ||
| Accounts receivable | $5,000 |
Later, ABC Co. presents that check to the bank. However, the bank denies the company a payment due to insufficient funds in the customer’s account. On top of that, it charges ABC Co. a $100 NSF fee. ABC Co. records this transaction as follows.
| Date | Particulars | Dr | Cr |
| Accounts receivable | $5,100 | ||
| Bank | $5,100 |
The above transaction includes the original $5,000 reduced due to the check receipt. On top of that, it also consists of the $100 additional charge by the bank. ABC Co. does not bear this expense. Instead, it charges it to the customer, who will pay for it later.
Conclusion
An NSF check represents a bank check that gets denied due to insufficient funds in the bank account. It may occur due to various reasons, including timing differences. However, companies must record this amount as a reversal of the check receipt entry. Furthermore, they will also have to account for any fees charged by the bank for the NSF check.