How to Record a Bounced Check in QuickBooks Online

In this tutorial, you’ll learn how to record a bounced check in QuickBooks Online. QuickBooks doesn’t have a bounced check feature, so the process requires several steps.

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This tutorial is one in our series of Free QuickBooks Tutorials. The video below and the step-by-step illustrated instructions that follow present the same information.

What a Bounced Check Is

A bounced check is a check you receive from a customer that is returned by their bank because of insufficient funds. A bounced check has multiple effects on your accounting records and requires several adjustments. Your bank will likely charge a fee for a bounced check, which most businesses choose to pass through to the customer.

The Importance of Recording a Bounced Check in QuickBooks

When a check bounces, the bank balance shown in QuickBooks Online is overstated since the bounced check is shown as a deposit. It’s important to immediately adjust your QuickBooks bank balance so the correct amount is displayed. You also must show that the customer still owes you for the original invoice as well as any fee you charge for returned checks.

Recording a bounced check is complicated and requires several steps. There are multiple ways to record a bounced check, but we present what we believe is the most efficient way while still maintaining a paper trail and making reconciling your QuickBooks banking activity as simple as possible.

How to Record a Bounced Check in QuickBooks Online in 4 Steps

To record a bounced check, you must complete the following steps:

1. Decrease the bank balance for the deposited check that bounced.
2. Reopen the original invoice showing that it has not been paid.
3. Record the nonsufficient funds (NSF) fee charged by your bank.
4. Bill your customer an NSF fee.

Let’s follow a hypothetical example with Paul’s Plumbing to illustrate how to record a bounced check.

• On June 24, 2020, Paul’s Plumbing issued Cole Home Builders Invoice #71142 for $10,000.
• On July 5, Cole Home Builders paid the full invoice with check #1010.
• Also on July 5, Paul’s Plumbing recorded the check as received and placed it in undeposited funds.
• On July 6, Paul’s Plumbing deposited check #1010 along with other customer checks in its Bank of America checking account.
• On July 13, Bank of America notified Paul’s Plumbing that check #1010 was returned for nonsufficient funds and charged them an NSF fee of $25.

1. Record the Decrease in Bank Balance

We must decrease the Bank of America checking balance on July 13 when we learn that the $10,000 check from Cole Home Builders has bounced. We’ll do this by recording an expense out of the Bank of America account. Click the New button at the top of the left menu bar and then select Expense in the second column under Vendors:

The expense entry should decrease the bank account and increase accounts receivable (A/R) since the customer now owes us for the check that bounced. Here is the expense entry to decrease the Bank of America checking account for our hypothetical example:

1. Payee: Select the customer whose check bounced
2. Payment account: Select the bank account where the bounced check was deposited
3. Payment date: Enter the date the bank notified you of the bounced check
4. Payment method: Select cash as the payment method
5. Category: The category must be Accounts Receivable, which is an asset account and records the amount owed to you by the customer
6. Description: Provide a description indicating that this entry is being made to record a bounced check
7. Amount: Enter the amount of the bounced check

Click the green Save and close button when you have entered all the information.

2. Reopen the Original Invoice

The customer invoice was marked as paid when the original check was received. However, now that the check has bounced, the invoice needs to be reopened and sent to the customer.

Navigate to customers by hovering over Sales in the left menu bar and then click on Customers:

Scroll down to find the customer whose check bounced and click on their name to open a list of their transactions. In the list of the customer’s transactions, locate the original invoice and the original payment received:

Notice that the original invoice #71142 for $10,000 is marked as paid. To reopen invoice #71142, we need to edit how the payment received with Check #1010 was applied. Click Closed in the right column of the payment line to open the receive payment screen:

The receive payment screen applies check #1010 to the invoice #71142, which is no longer correct since the payment bounced. To reopen the invoice, uncheck the box to the left of the invoice and check the box to the left of the check that was created in step one. Now, click the green Save and Close button, and the invoice in the transaction list should now have a status of Open or perhaps Overdue.

You can now email or print and mail the invoice to the customer as discussed in How to Create and Send Invoices.

3. Record the NSF Fee

Next, we must record the NSF fee that was charged by your bank. If this is the first time you are recording an NSF fee, you should first create a Service Item so the fee can be marked-up and billed to the customer.

The details of adding Service Items was discussed in How to Set Up Products and Services, but we’ll cover it again so we can talk about the specifics applicable to setting up the NSF Fee. Hover over Sales in the left menu bar and then click Products and Services:

From the products and services screen, click the green New button in the upper right corner to create a new product or service item:

The Product/Service information screen that appears after clicking New provides the four types of items that can be created for products and services. Click on the third item, which is Service. Here is an example of how to complete the add Service screen that will appear:

A. Name: Name the Service Item NSF Fee or something similar.

B. Sell service to customer: Check the box indicating you sell this service to your customer. This will make it easier to add an NSF Fee to your customer’s invoice.

C. Description: Enter a description of the charge you would like to appear on your customer’s invoice.

D. Sales price/rate: Input the amount you would like to charge your customers for a bounced check. This does not necessarily have to be the same amount as the bank charges you. There is nothing wrong with charging the customer for your inconvenience, but it’s a good idea to state your charge for returned checks at the bottom of all your invoices.

E. Income account: Select the income account where you want to record the fees collected from your customers.

F. Sales tax category: Select nontaxable if NSF fees charged to clients are not subject to sales tax in your state.

Scroll down to complete the purchasing information for the NSF Fee Service Item:

G. Purchase this service: Check the box to indicate that you purchase this service from a vendor.

H. Description: Provide a description to appear on your internal purchase and expense forms.

I. Cost: Enter the amount of your bank’s NSF fee.

J. Expense account: Select the expense account where you want to record the NSF fee charged to you by your bank.

When you are finished, click the green Save and close button.

Now that we have created a Service Item for the NSF fee, recording the expense of the fee will be easy. Open a new expense screen by clicking on New at the top of the left menu bar and then selecting Expense as done in step 1.

Here is an example of how to record the NSF fee for the example with Paul’s Plumbing:

A. Payee: Select the bank that charged you an NSF fee as the payee. If the bank is not yet set up as a customer, select Add New and provide the bank’s information.

B. Payment account: Select the account where the NSF fee was charged.

C. Payment date: Enter the date the NSF fee was charged to you.

D. Payment method: Select cash for the payment method.

E. Product/Service: Under Item details (not Category details), select the NSF Fee item you set up in the first part of this step. Once you select the item, the Description, Qty, Rate, and Amount will autopopulate based on the information you provided when you set up the item.

F. Billable: If you want to charge your client a fee for the bounced check, place a checkmark under Billable. This will autopopulate Markup% and Sales Amt. This box must be checked for the charge to be available when you create a customer invoice in the next step.

G. Customer/Project: If you’ve marked the expense as billable, you must select the customer whose check bounced.

When you’re finished entering your data, be sure to click the green Save and close button. If you want to bill your client for an NSF fee, then continue to step four. Otherwise, you are done recording the bounced check activity.

4. Bill an NSF Fee

The last step is to bill your customer an NSF fee, which is optional. Click on New on the top of the left menu bar and then select Invoice under Customers in the first column. A new invoice screen will appear. In the Customer field, select the customer whose check bounced. A list of billable expenses will then appear to the right of the invoice:

Locate the billable NSF fee you created in the prior step and click Add. The billable expense will autopopulate the billing detail of the invoice. Here is the completed invoice screen for our example with Paul’s Plumbing:

A. Customer: Select the customer whose check bounced. After selecting the customer, all the other customer information fields will autopopulate. Of course, you can change them if needed.

B. Service information: This entire section autopopulated when you added the billable expense in the previous screenshot.

Click Save and send to finish the process. For additional information on saving, printing, and emailing invoices, review the prior tutorial How to Create and Send Invoices.

Wrap Up

Congratulations on finishing what could be the most complex tutorial in our QuickBooks Online Training Course. Hopefully, you won’t have to do it often, but you now know all the steps needed to record a bounced check and bill the customer an NSF fee. The next tutorial in our QuickBooks Online Training Course is How to Process Bank Reconciliations. That tutorial will teach you to reconcile your QuickBooks Online banking activity with your bank statement to make sure you have recorded all the activity.