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  6. How to Account For a NSF (Bounced) Check Deposits

How to Account For a NSF (Bounced) Check Deposits

Introduction

When you deposit a check, the bank records the funds received into your bank account. If the issuing bank fails to pay (fails to honor) the check, your bank will reverse the deposit and withdraw the funds from your account. Accountants and bookkeepers refer to these as not sufficient funds (NSF), bounced, or rubber checks.

Because the deposit appears on your bank statement separately from the withdrawal made when the check “bounces”, you cannot simply delete the check from your records. Instead, you have to record both the deposit and the withdrawal as separate transactions.

There are three types of transactions that may be affected: trust deposits, matter-related operating deposits and other operating deposits. This article covers the following for each

  • How to notate the bounced deposit on the original transaction
  • How to record the reversal
  • How to enter the NSF bank fee
Caution

Do not use the void transaction feature to reverse a bounced check, instead follow the steps below.

For Trust Deposits

Checks deposited into the trust account generally fall under two categories – client retainers or other deposits, e.g., settlement checks, refunds from third-party vendors, etc. Here is how to account for these checks within this system when they bounce:

Modify the original deposit transaction memo line

You can either locate the transaction from the accounting > bank > transaction area utilizing search filters – or go within that specific matter. For trust transactions, starting with the matter may make locating the transaction easier.

    1. From the Matters Tab, select the corresponding matter and click Details, or simply double-click the matter
    2. From the Matter Details screen, click Banking

3. Find the deposit in question. You can use the search filters on the right-hand side to assist

4. Once located, click edit or double click on the deposit.

5. In the Edit Trust Retainer screen, modify the memo line(s) to indicate that the check bounced or was NSF, etc., and reference the date of the reversal. Make note of the Account used on this transaction.

6. When ready, click Save

 

Enter Reversal: Trust Withdrawal

    1. From the Matters Tab, select a matter and click Details, or simply double-click the matter
    2. From the Matter Details screen, click Banking

3. Click on the Trust Transactions menu and select Withdrawal.

4. In the Matter’s Trust Withdrawal screen, enter the Client Matter, Date, Type, Payor (Trust Bank), and Amount. In the memo line enter language indicating that this is a reversal due to an NSF check. Also, reference the check number and date of the original deposit. For Account, choose the same trust liability account used on the deposit transaction.

5. When ready, click Save.

All set!

The bounced trust deposit check has now been accounted for in your records and should be cleared appropriately when reconciled. 

Most deposits to your operating account related to matters will fall under two categories – Invoice Payments or Operating Retainers. Here is how to account for these checks within this system when they bounce:

Modify the original deposit transaction memo line

You can either locate the transaction from matter details > banking area or from within the Accounting section. For this example, we will be locating these items in the accounting section. 

1. Click on the Accounting Tab

2. Select the bank account (where the transaction was originally deposited), and click  Details, or simply double-click on the bank account.

3. From the Transaction tab, find the deposit in question. You can use the search filters on the right-hand side to assist

4. Double click on the deposit.

5. In the Edit Operating Transaction/Retainer screen, modify the memo line(s) to indicate that the check bounced or was NSF, etc., and reference the date of the reversal. Make note of the Account used on this transaction. When ready, click Save. 

Unlink Deposit from Invoice

Note

If you are simply reversing an operating retainer which is not linked to an invoice – skip to the next section regarding issuing a credit memo

1. From the Matters Tab, select a matter and click Details, or simply double-click the matter

2. From the Matter Details screen, click Billing and click on the invoice tab

3. Find the invoice the client payment was applied to. You’ll want to use the search filter to view all invoices whether paid or unpaid.

4. Click on the orange arrow to the right of the invoice, This will open the invoice details screen. 

5. Make a note of the dates and amounts of all payments recorded on the invoice. Then close this window

6. Highlight the invoice again and click on Action and choose Unfinal Invoice. This will now allow edits on that invoice. (this is a permission-based function)

7. With the invoice still highlighted, click on Edit.

8. Making no changes, click on generate (this is a required step to unlink the payment from the invoice). You will receive a warning stating that this will unlink any payments that have been applied to the invoice and will ask you if you want to continue. Click on Yes.

Info

If you receive an error at this time, you will first need to allow operating retainers in your system setup under Firm Preferences.

The invoice is now marked as unpaid and the original payment has now been moved to the operating retainer and is ready for you to reverse.

Caution

If there were multiple payments applied to the invoice, you can now reapply those to the invoice using the “invoice payment using operating retainer” function. It is recommended to apply these funds individually as they were received. For each, you should use the original payment date and original payment amount. You will need to repeat this step for each transaction that was unlinked from the invoice, NOT including the one which bounced.Once complete, there should be a remaining balance on the invoice. 

Enter Reversal: Credit Memo

Now that all funds from the deposit are in the operating retainer, you’ll want to account for the bank’s reversal of the deposit and withdrawal of the funds from your account. 

    1. From the Matters Tab, select a matter and click Details, or simply double-click the matter
    2. From the Matter Details screen, click Banking

 

3. Click on Action and select Credit Memo.

4. In the Credit Memo screen, enter the Date, Type, Payor, and Amount.

Note

The system automatically populates the full operating retainer amount. If you have funds here in addition to the bounced deposit, adjust accordingly.

5. In the memo line enter language indicating that this is a reversal due to an NSF check. Also, reference the check number and date of the original deposit. The system will automatically fill in the Account. You will receive a warning that you are allocating outgoing funds to an account normally used for incoming funds and asked if you want to proceed. Click on Yes.

All set!

Now all client balances are correct, invoices are unpaid, and the transaction is accurately reflected on in all locations.

For Other Operating Deposits

Modify the deposit transaction memo line

1. Click on the Accounting Tab

2. Select the bank account (where the transaction was originally deposited), and click  Details, or simply double-click on the bank account.

3. From the Transactions tab, find the deposit in question. You can use the search filter on the right-hand side to assist

4. Double click on the deposit. In the Edit Operating Transaction screen, modify the memo line(s) to indicate that the check bounced or was NSF, etc., and reference the date of the reversal. Make note of the Account used on this transaction. When ready, click Save.

Enter Reversal: Operating Withdrawal

    1. Click on the Accounting Tab

2. Select the bank account (where the transaction was originally deposited), and click Details, or simply double-click on the bank account.

3. From the Transactions tab,  click on Add and select Withdrawal.

4. In the Add Transaction screen, enter the Date, Type, Payor, and Amount. In the memo line enter language indicating that this is a reversal due to an NSF check. Also, reference the check number and date of the original deposit. For Account, choose the same account used on the deposit transaction.

All set!

The bounced check has now been accounted for in your operating bank records.

Recording Associated NSF Bank Fees

In addition to accounting for the original deposit and bank reversal, you also must account for the NSF fee that the bank may have charged. 

If Seeking Reimbursement From Client

Create a Hard Cost Expense (associated with the matter), using the date the fee was posted by the bank. Be sure to add the appropriate notes and descriptions for this expense. 

This will then show on the next invoice for the matter.

If Firm is Absorbing Fee

If the firm is choosing to not pass this fee to the client, you will need to enter an associated operating bank charge. 

1. Click on the Accounting Tab

2. Click on the Bank Account (from which the fee was taken), and click Details or simply double-click the bank account

3. From the transactions tab,Add a withdrawal transaction.

4. Complete the Add Transaction screen. For the Account, select “6075: Bank & Merchant Service Charges”. or whatever account you have set aside for this purpose. Ensure the bank’s posting date is selected.

Updated on June 1, 2020

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