A customer pays with a check. The entity debits cash and credits accounts receivable. Then the check bounces.
The economics went backwards: the entity does not have the cash and the customer still owes the money. The entry reverses the original one, debiting accounts receivable and crediting cash. If the bank charged a fee for handling the return, it is usually charged on to the customer, which raises the receivable further.
On a reconciliation the item goes on the book side, subtracted. The bank already knows the check failed and has already removed the money; the entity is the one whose records are wrong, so an entry is required.
A returned check is a credit event, not just a clerical one. A customer whose check bounced is a customer whose next invoice deserves a closer look when the allowance for credit losses is estimated.
For a $2,800 returned customer check, debit Accounts Receivable and credit Cash for $2,800 under the stated facts. Match the bank debit to the original deposit and customer before posting. If the bank also charges a fee, decide from the agreement whether the entity bears it or has a supported claim against the customer. The reconciliation identifies the missing book event; it does not decide collectibility or authorize a customer charge.
Put the concept to work
Understand this concept
- Explain what a returned check does to cash the entity already recorded, and say why it adjusts the book side of a reconciliation.
Apply this concept
- Write the entry a returned check requires, including any fee the bank charged, and place the item on the reconciliation with the correct sign.
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Build on these ideas
- Accounts receivable — Understand
To apply this concept: Required. The debit restores the customer receivable.
To understand this concept: Required. The reversal restores a claim on the customer.
- Bank reconciliation — Understand
To understand this concept: Required. The item is defined by its place on the reconciliation.
- Non-sufficient funds check — Understand
To apply this concept: Required. Recording the reversal requires knowing what it reverses.
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Use this idea next
- Bank reconciliation — Apply
Required level here: apply. Required. A returned check is a standard book-side adjustment.
- Non-sufficient funds check — Apply
Required level here: understand. Required. Recording the reversal requires knowing what it reverses.