If you run a small business, you may have encountered the problem of non-sufficient funds (NSF) or bounced checks from your customers. This is when a customer pays you with a check, but the check is returned by the bank because the customer’s account does not have enough money to cover the payment. This can cause a lot of headaches and hassles for you, as you have to deal with the unpaid invoice, the bank fees, and the possibility of losing the customer’s trust.

In this blog post, we will explain what NSF or bounced checks are, how to enter them in QuickBooks, how to track them, and how to handle them effectively.

What Are Non-Sufficient Funds (NSF)?

Non-sufficient funds (NSF) is a term used by banks to indicate that a check cannot be processed because the account of the person who wrote the check does not have enough money to cover the amount.

When this happens, the bank will return the check to the person who deposited it, and charge a fee for the returned check. The person who deposited the check will also have to pay a fee to their bank for the bounced check.

This means that both parties will lose money because of the NSF check.

NSF checks can happen for various reasons, such as errors in accounting, cash flow problems, fraud, or simply forgetting to transfer money to the right account. Whatever the reason, NSF checks can have negative consequences for both the payer and the payee. For the payer, NSF checks can damage their credit score, incur overdraft fees, and result in legal actions or collections. For the payee, NSF checks can cause cash flow issues, lost revenue, and wasted time and resources.

How to Enter Non-Sufficient Funds in QuickBooks?

If you receive a NSF or bounced check from a customer, you need to record it in your QuickBooks account, so that you can keep track of the unpaid invoice and the bank fees. There are two ways to enter NSF checks in QuickBooks: the expense method and the invoice workaround method. We will explain both methods in detail below.

Tracking the NSF Check

The first method to enter NSF checks in QuickBooks is the expense method. This method involves creating an expense account for NSF checks, and recording the bounced check and the bank fees as expenses. To use this method, follow these steps:

Create an expense account for NSF checks.

  1. Go to the Chart of Accounts
  2. Click on New
  3. Select Expense as the account type, and name it NSF Checks or Bounced Checks.
  4. Create an item for NSF checks.
  5. Go to the Products and Services list, click on New, select Non-inventory as the item type, and name it NSF Check or Bounced Check.
  6. In the Income account field, select the NSF Checks expense account that you created in the previous step.

Record the NSF check as an expense.

  1. Go to the Expenses tab, click on New transaction, and select Expense.
  2. In the Payee field, enter the name of the customer who gave you the bounced check. In the Payment account field, select the bank account where you deposited the check.
  3. In the Category details section, select the NSF Checks expense account, and enter the amount of the check.
  4. In the Memo field, enter the check number and the invoice number that the check was supposed to pay. Save and close the expense.

Record the bank fee as an expense.

  1. Go to the Expenses tab, click on New transaction, and select Expense.
  2. In the Payee field, enter the name of your bank.
  3. In the Payment account field, select the bank account where you deposited the check.In the Category details section, select the Bank Fees expense account, and enter the amount of the fee.
  4. In the Memo field, enter the check number and the invoice number that the check was supposed to pay. Save and close the expense.

Mark the invoice as unpaid.

  1. Go to the Sales tab, click on Invoices, and find the invoice that the check was supposed to pay.
  2. Open the invoice, and click on Receive payment.
  3. In the Receive payment window, select the NSF Check or Bounced Check item that you created in the second step, and enter the amount of the check.Make sure that the date and the reference number match the check.
  4. Save and close the payment.

The expense method is simple and straightforward, but it has some drawbacks. One drawback is that it does not show the NSF check as a deduction from your income, but as an expense. This means that your income statement will not reflect the true amount of revenue that you earned from your customers. Another drawback is that it does not allow you to charge the customer for the NSF check fee, or to send them a reminder or a statement of their outstanding balance.

What Are the Steps for Invoice Workaround?

The second method to enter NSF checks in QuickBooks is the invoice workaround method. This method involves creating a service item for NSF checks, and recording the bounced check and the bank fees as negative invoices. To use this method, follow these steps:

Create a service item for NSF checks.

  1. Go to the Products and Services list, click on New, select Service as the item type, and name it NSF Check or Bounced Check.
  2. In the Income account field, select the same income account that you use for your sales. In the Sales price/rate field, enter a negative amount that equals the amount of the check. For example, if the check was for $500, enter -$500.

Create a service item for bank fees.

  • Go to the Products and Services list, click on New, select Service as the item type, and name it Bank Fee or NSF Fee.
  • In the Income account field, select the same income account that you use for your sales.
  • In the Sales price/rate field, enter a negative amount that equals the amount of the fee. For example, if the fee was $25, enter -$25.

Record the NSF check as a negative invoice.

  • Go to the Sales tab, click on New transaction, and select Invoice.
  • In the Customer field, enter the name of the customer who gave you the bounced check.
  • In the Product/Service column, select the NSF Check or Bounced Check item that you created in the first step.
  • In the Description column, enter the check number and the invoice number that the check was supposed to pay.
  • Save and send the invoice. This will deduct the NSF check amount from your income, and add it to the customer’s balance.

Record the bank fee as a negative invoice.

  1. Go to the Sales tab, click on New transaction, and select Invoice.
  2. In the Customer field, enter the name of the customer who gave you the bounced check.
  3. In the Product/Service column, select the Bank Fee or NSF Fee item that you created in the second step.
  4. In the Description column, enter the check number and the invoice number that the check was supposed to pay.
  5. Save and send the invoice. This will deduct the bank fee amount from your income, and add it to the customer’s balance.

Mark the invoice as unpaid.

  1. Go to the Sales tab, click on Invoices, and find the invoice that the check was supposed to pay.
  2. Open the invoice, and click on Receive payment.
  3. In the Receive payment window, select the NSF Check or Bounced Check item that you created in the first step, and enter the amount of the check.
  4. Make sure that the date and the reference number match the check.
  5. Save and close the payment. This will mark the invoice as unpaid, and reduce the customer’s balance by the NSF check amount.

The invoice workaround method is more complex and time-consuming, but it has some advantages. One advantage is that it shows the NSF check and the bank fee as deductions from your income, rather than as expenses. This means that your income statement will reflect the true amount of revenue that you earned from your customers. Another advantage is that it allows you to charge the customer for the NSF check fee, and to send them a reminder or a statement of their outstanding balance.

How to Handle Bounced or Non-Sufficient Funds Check from Clients in QuickBooks?

Whichever method you choose to enter NSF or bounced checks in QuickBooks, you still need to handle the situation with your customers. Here are some tips on how to deal with NSF or bounced checks from your customers:

  • Contact the customer as soon as possible. As soon as you receive the notice from your bank that a check has bounced, you should contact the customer and inform them of the situation. You should ask them to pay the invoice and the bank fee as soon as possible, and to provide you with a proof of payment. You should also explain the consequences of not paying, such as late fees, interest charges, collections, or legal actions.
  • Be polite but firm. When you contact the customer, you should be polite and professional, but also firm and assertive. You should not accuse the customer of fraud or dishonesty, but you should also not accept any excuses or delays. You should make it clear that you expect the customer to honor their commitment and pay what they owe you.
  • Offer alternatives. Sometimes, the customer may have a genuine reason for the NSF or bounced check, such as a temporary cash flow problem, a bank error, or a personal emergency. In such cases, you may want to offer the customer some alternatives, such as a payment plan, a partial payment, or a different payment method. However, you should not agree to any alternative that puts you at risk of losing more money or time.
  • Follow up. After you contact the customer, you should follow up with them until you receive the payment. You should send them reminders, statements, and invoices, and keep a record of all the communication. You should also update your QuickBooks account with any payments or adjustments that you receive from the customer.
  • Take action. If the customer fails to pay the invoice and the bank fee within a reasonable time, you may have to take action to recover your money. Depending on the amount and the situation, you may have to hire a collection agency, file a lawsuit, or write off the debt as a bad debt. You should consult with your accountant or lawyer before taking any legal action.

NSF or bounced checks from customers can be a frustrating and costly problem for small business owners. However, by using QuickBooks to record and track them, and by following some best practices to handle them, you can minimize the impact and protect your cash flow and reputation.

FAQs on NSF or Bounced Checks from Customers

What is an NSF or bounced check?

An NSF or bounced check is a check that is returned by the bank because the customer’s account does not have enough funds to cover the amount of the check. This can also happen if the customer’s account is closed or frozen, or if there is a problem with the check itself, such as a missing signature or a discrepancy in the amount.

How do I record an NSF or bounced check in QuickBooks?

To record an NSF or bounced check in QuickBooks, you need to create a service item called NSF Fee and assign it an income account. Then, you need to create a credit memo for the customer using the NSF Fee item and apply it to the original invoice. You also need to create a journal entry to reverse the deposit and the bank fee, and adjust your bank balance accordingly.

How do I prevent NSF or bounced checks from customers?

There are some steps you can take to prevent or reduce the chances of receiving NSF or bounced checks from customers, such as:

  • Screening new customers and checking their credit history and references.
  • Using electronic payment methods, such as credit cards, debit cards, or online transfers, instead of checks.
  • Setting clear payment terms and policies, and communicating them to your customers.
  • Verifying the customer’s account information and the check details before accepting it.
  • Depositing the checks as soon as possible after receiving them.

How do I contact a customer who gave me an NSF or bounced check?

You should contact the customer as soon as you receive the notice from your bank that the check was returned. You should be polite, professional, and firm, and explain the situation and the consequences. You should ask the customer to pay the invoice and the bank fee as soon as possible, and offer them alternative payment options. You should also document the conversation and send a written confirmation to the customer.

How do I follow up with a customer who gave me an NSF or bounced check?

You should follow up with the customer until you receive the payment. You should send them reminders, statements, and invoices, and keep a record of all the communication. You should also update your QuickBooks account with any payments or adjustments that you receive from the customer.

How do I take action against a customer who gave me an NSF or bounced check and refuses to pay?

If the customer fails to pay the invoice and the bank fee within a reasonable time, you may have to take action to recover your money. Depending on the amount and the situation, you may have to hire a collection agency, file a lawsuit, or write off the debt as a bad debt. You should consult with your accountant or lawyer before taking any legal action.

How do I report an NSF or bounced check on my taxes?

An> NSF or bounced check is not considered income until you receive the payment from the customer. Therefore, you should not report it as income on your taxes until then. However, you can deduct the bank fee and any expenses related to collecting the payment as business expenses.

How do I avoid NSF or bounced check fees from my bank?

You can avoid NSF or bounced check fees from your bank by keeping a sufficient balance in your account, setting up overdraft protection, and monitoring your account activity regularly. You can also negotiate with your bank to waive or reduce the fee if it is your first time or if you have a good banking relationship.

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