NSF Check

An NSF check is a check the payor bank refuses to pay and returns unpaid because the account it is drawn on does not hold enough available funds to cover it. NSF stands for non-sufficient funds (Office of the Comptroller of the Currency, HelpWithMyBank.gov), and the same item is also called a bounced check, or more broadly a returned item or a dishonored check, labels that cover returns for reasons other than funds as well. The payor bank is the bank the check is drawn on, the one holding the account of the drawer, meaning the person or business that wrote it.

The Uniform Commercial Code fixes the moment it happens, and states enact their own version of it, so the operative text is your client’s state law. A check duly presented to the payor bank for anything other than immediate payment over the counter is dishonored if that bank makes timely return of the check, sends timely notice of dishonor or nonpayment, or becomes accountable for the amount of the check (UCC 3-502(b)(1)). The event is the return or the notice, not a decision taken quietly inside the bank.

Which Side of the Check You Are On

Your side decides which entry you make. The drawer wrote a check the account could not cover, so the drawer’s bank can assess a fee for it, as long as the practice was previously disclosed (OCC, HelpWithMyBank.gov). The payee banked the check, recorded the money as received, and now has that entry to undo. A firm doing client accounting work meets both sides, the drawer’s fee when a client’s own check is returned, and the payee reversal when a check the client deposited comes back.

What the Payee’s Books Do

The credit the bank gave on deposit was provisional, which is the reason it can be taken back at all. A collecting bank that has made provisional settlement with its customer and fails, by reason of dishonor, to receive settlement that is or becomes final may revoke the settlement, charge back the amount of any credit given for the item to its customer’s account, or obtain refund from its customer, if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts (UCC 4-214(a)).

The Comptroller of the Currency puts the payee’s position in plainer terms. If the bank credited the account for a check later returned unpaid for insufficient funds, the bank can reverse the funds and may charge a fee, and the payee has to pursue the maker of the check to seek reimbursement (OCC, HelpWithMyBank.gov).

So three things move on the payee’s side. Recorded cash comes back down by the face amount of the check. The accounts receivable balance is reinstated, in the control account and in that customer’s line of the subsidiary ledger, because the invoice was never actually paid. The bank’s returned-item fee is a separate charge against the payee’s own account and belongs in an expense account of its own rather than netted into the customer balance. All of it usually surfaces at close as a book-side item on the bank reconciliation, because the bank recorded the return before the books did.

A Worked Entry

Say a client deposited a customer’s check against an open invoice, and the bank later returned the item unpaid and charged a returned-item fee set by its own account agreement. On the stated amounts below, the correction runs like this.

stated inputs
  check deposited and recorded as received         4,200
  bank's returned-item fee                            15

Accounts receivable, customer subsidiary account   4,200
     Cash                                                  4,200
     reversing the deposit the bank took back

Bank fees expense                                     15
     Cash                                                     15
     the returned-item charge, kept off the invoice

The invoice is open again at its original amount and ages from its original date, so nothing about the customer’s payment history is quietly repaired by the reversal. The fee stays the payee’s cost until the customer agrees to cover it, and billing it on is a separate charge rather than an adjustment to the original invoice.

What an NSF Check Is Not

An Overdraft

An overdraft is the opposite outcome on the same short account, because the bank pays the item and lets the balance go negative instead of returning it, and it may charge against a customer’s account an item that is properly payable from that account even though the charge creates an overdraft (UCC 4-401(a)).

A Stop Payment

A stop payment is the drawer’s own instruction not to pay an item the account could have covered, given by an order describing the item with reasonable certainty and received in time for the bank to act on it, and effective for six months, though an order given orally and not confirmed in a record lapses after 14 calendar days (UCC 4-403(a) and (b)).

A Stale-Dated or Post-Dated Check

A stale-dated check fails on age rather than on funds, since a bank is under no obligation to pay a check, other than a certified check, presented more than six months after its date (UCC 4-404), and what to do with one still sitting on a reconciliation is worked through in account reconciliation services. A post-dated check may be charged against the account even though payment was made before the date written on it, unless the customer gave the bank notice of the postdating describing the check with reasonable certainty (UCC 4-401(c)).

Only the NSF return combines a short account with the bank’s refusal to pay. The payee’s entry looks much the same for any item the bank sends back, so what separates these is the reason recorded against the item rather than the debits and credits.

Common Questions

If returned items and other close-day corrections stack up faster than your reviewers can clear them, a trial task puts a block of your own work through Accountably’s review chain so your reviewer grades the output first.