Bounced Checks and NSF Fees: How to Handle Them in Your Books
When a customer's check bounces, it creates more than one bookkeeping entry, and skipping the cleanup is what makes month-end reconciliations such a pain. The income you originally recorded isn't real, the deposit the bank gave you has been clawed back, and you've probably been hit with a fee. Here's a clean, repeatable way to handle bounced checks and NSF charges in your books.
Why a Bounced Check Is More Than One Entry
When a check clears, you booked a sale and a deposit. When it bounces, the bank pulls that money back out of your account. Now your books are off in two places: the income you counted, and the cash you don't actually have. On top of that, your bank likely charged you a returned-item fee, and you may decide to charge your customer one too. Each piece gets its own line so you can find it later if you need to.
Step 1: Reverse the Original Deposit
Find the deposit where the bounced check was originally included. The cleanest fix is to remove the check from that deposit (or reverse the whole deposit if the check was the only item in it). In QuickBooks, Xero, or Wave, that means reducing your Undeposited Funds or the deposit total by the check amount. The goal is for the deposit record to match what the bank actually gave you.
If you already reconciled the month the check was originally deposited, you'll need to undo that reconciliation first or your edit won't stick. Most programs walk you through this with an "Undo Reconciliation" or "Revert" option.
Step 2: Record the NSF Fee Your Bank Charged
Open your bank statement and find the returned-item fee. Post it as a bank expense using a specific category like "Bank Service Charges" or "Returned Item Fees." Don't bury it in "Miscellaneous" — if the same customer bounces multiple checks, you'll want to see the pattern.
Step 3: Decide How to Track What the Customer Still Owes
You have a few options for the receivable:
- Leave it on the original invoice. When the customer pays with a good check or card, apply it to the same invoice. This is usually the simplest path.
- Create a separate "bounced check receivable." Some owners like to track returned items apart from regular A/R so they can spot risky customers at a glance. Book it as a receivable, then write it off to bad debt if it's never paid.
- Charge a returned-check fee. If your contract or posted policy allows it, add a fee to the invoice and book it as income, not as an offset to the original sale.
Whichever option you choose, do it the same way every single time. Consistency is what makes your books useful six months from now.
Step 4: Reconcile So the Bank Matches
After making the entries, run your reconciliation for the affected month. You should see the original deposit reduced by the bounced check, plus the NSF fee as its own line. If the original deposit was already reconciled, undo that reconciliation, re-enter the deposit correctly, then reconcile again. It only takes a few minutes once you've done it the first time.
A Few Practical Tips
- Move quickly. The longer a bounced check sits uncorrected, the harder it is to trace back to the right invoice.
- Contact the customer in writing. A short email or letter saying "your check was returned, please remit payment plus any applicable fee by [date]" protects you if it goes to collections or small-claims court.
- Stop accepting checks from repeat offenders. You don't have to. Card payments, ACH, or even a payment link through your invoicing software remove the problem entirely.
- Watch the trend. If bounced checks start to feel common, the issue is often your invoicing or follow-up cadence, not the customers.
If bounced checks are starting to feel like a regular chore in your books, TwoDayBooks handles the cleanup and reconciliation as part of our monthly bookkeeping for small businesses, so the entries get posted the same way every time.