PLEASE NOTE: M.I.C.S. DOES NOT RECOMMEND ANY SPECIFIC METHOD TO REMEDY THIS SITUATION, BUT DOES STRONGLY RECOMMEND THAT YOU CONTACT YOUR C.P.A. FOR ADVICE.
NSF: Non Sufficient Funds on a mailing from the bank is never welcomed. Other terminology comes to mind: Insufficient Funds, or the most infamous, bounced check.
The question is how to handle it in BIS®. As with many other aspects of accounting, the question about how to handle this problem depends a lot on when it becomes known in the accounting process.
Let’s examine the normal accounting postings for a successful transaction as a base line.
| Description | Debit | Credit |
| Sale | AR | Revenue |
| Receipt | Cash | AR |
Those postings arose from the entry of a customer invoice, and later, the entry of a cash receipt. Usually following the cash receipt, the item is added to a deposit slip, the total of which becomes a single entry in the Bank Reconciliation system and bank statement.
What if the payment was made by a check with insufficient funds? It all depends on when that information is received and what actions had already taken place with respect to the original check.
This information sheet will describe several alternatives to fix the problem in BIS®, but will go into detail using one method. PLEASE NOTE: MICS DOES NOT RECOMMEND ANY SPECIFIC METHOD TO REMEDY THIS SITUATION, BUT DOES STRONGLY RECOMMEND THAT YOU CONTACT YOUR C.P.A. FOR ADVICE.
Alternative 1:
In the perfect world, the customer calls before the check amount is processed in any way, and thus the check is held without any processing. Thus, nothing is received and nothing is posted while awaiting the word that there are sufficient funds to safely deposit the check.
Alternative 2:
Suppose that the check is applied as a receipt, and the check is returned by the bank NSF, but the reconciliation has not yet occurred. Two options are available:
- If the customer funds are expected to be available very shortly and there is no concern about modifying the cash account balance for that brief period, the check may be resubmitted to the bank.
In that instance, it is important to put the check on its own deposit slip, independent of any other items that had been subsequently entered into BIS®. Assuming that the second “deposit” of the same check is covered, the only point to note is that the bank probably will show two extra transactions that will not be listed in the bank reconciliation reports for the deduction and subsequent deposit of the single check. Possible bank charges will be covered later.
- In the same scenario, but where the bank account amount needs to be kept accurate for each stage, a journal entry could be entered into the General Journal, crediting the cash account and a debit to revenue for the amount of the check. When the check clears those entries will need to be reversed with new, opposite entries.
In this variant, the bank reconciliation will include the two journal entries to the cash account, both of which must be cleared, if the check is shown as cleared on the bank statement.
| Description | Debit | Credit |
| NSF Check Notification | Revenue | Cash |
| Successful Redeposit | Cash | Revenue |
Alternative 3:
Here are the original Transactions:
| Original Sale | Description | Debit (+) | Credit (-) | ||
| Sale | AR | Revenue | |||
| Receipt | Cash | AR |
Suppose that the check (probably received very late in the month) is returned NSF after the bank account has been reconciled. It is not known when the check will be made good by the customer.
- Initially, all that is needed is to enter a negative Cash Receipt in BIS®. The negative Cash Receipt will be used to adjust the existing invoice. If the invoice had previously been “paid in full,” its sales or contract invoice number will not appear in the Find or Lookup functions, but the number still may be entered manually.
- Go to Transactions | Cash Receipts | Customer Payments and enter a negative amount for the Cash Receipt for the NSF check. Again, please note that if the underlying invoice had already been paid in full (by the NSF check, it will not be seen in the list of items when using Ctrl-F or Find icon. However, the invoice number may be entered manually.
- Place this reverse payment on its own deposit slip (in BIS®) so that it appears independently on the reports from the Bank Reconciliation module, just as it will on the bank’s monthly statement.
- If there is a bank fee, or if you impose a fee to your customer for the bad check, an invoice or Debit Memo should be created for that charge. The distinction is that the Debit Memo will be tied to the original Invoice number.
| Bank or Nuisance Fee | Description | Debit (+) | Credit (-) | ||
| Fee | AR | Fee Revenue |
- When the replacement check arrives, it is applied to the account’s invoice and included in a new deposit slip. In addition, another journal entry cleans up residual entry information.
These steps also ensure that the Bank Reconciliation module will present the correct items for balancing the checkbook, and the AR and GL ledgers will present the correct information.