Handling an NSF check in bank reconciliation takes two moves: subtract the check’s face value and the related bank fee from your book balance on the reconciliation worksheet, then post journal entries that credit Cash, debit Accounts Receivable for the face value, and debit Bank Service Charge Expense for the fee. The bank has already reversed the deposit on its side, so all of the correction happens on your books. Skipping it overstates cash and understates what customers owe.
Why the Adjustment Only Touches the Book Balance
When you first deposited the check, your accounting system debited Cash and credited Accounts Receivable (or Sales Revenue). The bank gave you provisional credit, and when the check bounced the bank reversed that credit automatically. By the time you open the bank statement, the bank’s records already reflect that the money never arrived.
Your books do not. They still show the deposit as though it cleared. That is why the NSF check appears as a subtraction from the unadjusted book balance on your reconciliation, alongside the bank’s returned-item fee, which is also usually unrecorded on your side.1HelpWithMyBank.gov. Non-Sufficient Funds (NSF) Fees and Overdraft Protection
One point that catches people out: listing these items on the reconciliation worksheet does not update the General Ledger. The worksheet is a working paper that proves the two balances agree. The ledger changes only when you post the journal entries.
Calculating the Total Book Adjustment
The hit to cash has two pieces: the face value of the bounced check and the bank’s processing fee. Add them and subtract the total from your unadjusted book balance.
Pull the face value from your original deposit record. The fee appears on the bank statement or on a separate NSF notification memo.
Say a customer’s $500 check bounced and the bank charged you $35:
- Unadjusted book balance: $12,000
- Subtract NSF check face value: −$500
- Subtract bank service charge: −$35
- Adjusted book balance: $11,465
That $11,465 should match your adjusted bank balance once you factor in outstanding checks and deposits in transit.
Journal Entries to Post After Reconciling
Two entries are always required. A third comes into play if you plan to bill the customer for the fee.
Reverse the Original Deposit
The first entry undoes the cash receipt and puts the amount back on the customer’s tab:
- Debit Accounts Receivable: $500
- Credit Cash: $500
This shifts the asset from Cash back to Accounts Receivable. You don’t have the money, and the customer still owes it.2Oracle. Correcting Account Balances for NSF Checks Using a Journal Entry
Record the Bank Fee
The bank’s charge is a separate operating expense:
- Debit Bank Service Charge Expense: $35
- Credit Cash: $35
Booking these to a dedicated expense account lets you see what bounced checks cost the business over a year.2Oracle. Correcting Account Balances for NSF Checks Using a Journal Entry
Pass the Fee to the Customer (Optional)
If your invoice terms or state law let you charge the customer a returned-check fee, add a third entry:
- Debit Accounts Receivable: amount of the fee
- Credit NSF Fee Income (or Other Income): same amount
This adds the fee to the customer’s balance and records it as income rather than offsetting your expense.2Oracle. Correcting Account Balances for NSF Checks Using a Journal Entry
ACH Returns Follow the Same Pattern
Bounced electronic payments work the same way on the books. When a customer’s ACH payment fails for lack of funds, the transaction returns with code R01. Subtract the returned amount and any bank fee from your book balance on the reconciliation, then post the same reversal and fee entries. The main practical difference is speed: ACH returns typically come back within two banking days, while paper checks can take longer.
Re-Depositing Before You Give Up
You can try depositing the check a second time. No law caps how many times a check can be re-presented, but most businesses stop at two attempts because each failure can trigger another round of NSF fees on both sides. Call the customer first to confirm funds are there.
If the redeposit clears, the new deposit creates a fresh debit to Cash and credit to Accounts Receivable, which reverses the journal entry you posted when the check bounced. Any customer fee income entry you booked stands on its own.
Move quickly. Banks can refuse checks that are stale-dated (generally older than six months), and delay rarely helps the odds that the account will have funds.
Writing Off an Amount You Can’t Collect
If the customer doesn’t pay, remove the receivable from your books. The entry depends on your method.
Under the allowance method, which GAAP requires when a business can reasonably estimate uncollectible amounts:
- Debit Allowance for Doubtful Accounts
- Credit Accounts Receivable
This reduces receivables without hitting the income statement, because the estimated expense was recognized earlier when you funded the allowance.
Under the direct write-off method, used by smaller businesses and required for federal income tax purposes:
- Debit Bad Debt Expense
- Credit Accounts Receivable
Direct write-off is simpler but violates GAAP’s matching principle because expense and revenue land in different periods. For tax purposes, the IRS generally requires the specific charge-off method, which functions like direct write-off: you deduct the specific debt in the year it becomes worthless.3Internal Revenue Service. Publication 334 (2025), Tax Guide for Small Business
Writing off the receivable doesn’t stop you from pursuing the debt. If the customer later pays, record it as a recovery.
Tax Treatment of the Loss and the Fee
Accrual-method taxpayers who already included the check amount in gross income can deduct the uncollectible amount as a business bad debt. Cash-method taxpayers generally cannot, because the income was never reported.3Internal Revenue Service. Publication 334 (2025), Tax Guide for Small Business
To take the deduction you must show the debt is worthless and that you made reasonable collection efforts. Sole proprietors claim it on Schedule C; other entities use their applicable business return. The deduction goes in the year the debt becomes worthless, which may or may not be the year the check bounced.4Internal Revenue Service. Topic no. 453, Bad Debt Deduction
The NSF fee itself is deductible as an ordinary business expense in the year you incur it, whether you’re on the cash or accrual method. It sits with your other banking charges on the return.