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How to Account For a Bounced Check from Client or Vendor

Introduction

A bounced check is a check that is rejected by the bank due to insufficient funds or other possible issues. As you accept checks for deposits or invoice payments, some may end up in this category and you’ll want to accurately account for them in your books in CosmoLex.

This article will walk you through how to appropriately record bounced checks. It’s important not to simply delete a check / deposit in your records, as it was deposited but later withdrawn by the bank. 

Before You Get Started

  • Double-check that the transactions in question have not been cleared in a reconciliation. If they have, you’ll want to remove or unclear them from the the closed reconciliation statement. To do this, you’ll have to delete the closed reconciliation statement, make your fixes, and reconcile that month again. 
  • If your transactions are part of a deposit slip, undo the deposit slip and re-add it if needed, once completed.
  • Create a new account in the Chart of Accounts, called “Bounced Checks and Reversals.” This should be a liability account. For any specific questions on your Chart of Accounts, or other related questions, please contact your accountant or one of our Certified Consultants.

Operating Transactions: Client Payments

Stop

If you haven’t, please read the “Before You Get Started” section before continuing with the instructions.

Reverse the Transaction

Most deposits to your operating transactions related to Client Payments will fall under two categories – Invoice Payments or Operating Retainers. If your bounced check was used for either of these reasons, you will need to first reverse the transaction and remove it from the matter, then properly post the bad check amount and any fees.

First, the recorded deposits will have to be removed from the matter and the system. To do so, follow the steps below (if you already know which payments are affected, you may skip down :

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

2. From the Matter Details screen, click Banking

3. Find the deposit in question. You’ll want to use the search filter to view operating bank transactions, in addition to using other parameters to find the deposit. If this was an invoice payment, and you want to verify which invoices were paid with this check, click on the icon on the right to see the details

4. When ready, select the payment and delete. Once again, if this is an invoice payment, deleting the transaction will unlink the payment from the invoice(s) and make the invoice(s) ‘Unpaid’ again.

This takes care of reversing the invoice payment.

Re-Post Deposit and Bank Reversal

Now you must re-post the deposit and the bank reversal under the correct account for accurate reporting. This will assist you with reconciliation and proper tracking in the future. To do so, follow these steps:

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,  Add a deposit transaction to reflect the original transaction.

4. Complete the “Add Transaction” screen. Be sure to use the data from the original check (date of deposit, who paid, check number, NSF, etc.), and that the matter information is noted on the transaction. When selecting the related [COA] account, select the newly created “Bounced Checks and Reversals” account (see Before Getting Started). When ready, click Save. 

5. If a deposit slip was originally used, add this transaction back to the original deposit slip. You can do so by going to the Deposit Slip tab, locating the slip, clicking Edit and checking this newly added deposit. 

6. Now that you’ve re-entered the original transaction, you’ll want to account for the bank’s reversal of it. If the check bounced, the bank has probably removed those funds from your account.  From the Transactions tab,  Add a withdrawal transaction.

7. Complete the “Add Transaction” screen. Select “Adjustment-Out” as type. Use the date the transaction was reversed in the bank and the client’s check number in the reference area and enter a memo with notes/reasoning. Post this to the same “Bounced Checks and Reversals” account. When completed, click Save.

Your “Bounced Checks and Reversals” account should always have a balance of ‘0.00’

Keep Track of Bank Fees

In addition to accounting for the original deposit and bank reversal, you also must account for the bank fee that may have come with the bounced check. 

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. 

Once this has been added as a Hard Cost Expense, you’ll be able to apply payment from client by usual means (direct payment or trust).

If Firm is Absorbing Fee

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. Select “Adjustment-Out” as the type, and select “6075: Bank & Merchant Service Charges” as the account. Ensure the bank’s posting date is selected.

Wrap Up

If you had to undo a reconciliation or deposit slip before you got started, make sure to add the transaction back to the deposit slip or to reconcile the transaction when you are finished. 

All set!

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

Operating Transactions: Other (i.e. Vendor Refunds)

Stop

If you haven’t, please read the “Before You Get Started” section before continuing with the instructions.

There may be other operating deposit transactions that result in a check being declined for insufficient funds or other reasons. In this case, you won’t need to reverse the original transaction, but you’ll need to make sure you post the bank reversal and any associated bank fees. 

Original Transaction

1. Click on the Accounting Tab

2. Select the bank account with the affected transaction, and click  Details, or simply double-click on the bank account

3. Find the affected transaction, select it and click  Edit

4. Add a memo or note to address the bounced check. Save.

Record Bank Reversal

1. From the same Transactions tab, Add a withdrawal transaction.

2. Select “Adjustment-Out” as type. Use the date the transaction was reversed in the bank and the client’s check number in the reference area and enter a memo with notes/reasoning. Post this to the same account that the original transaction was posted to.

Keep Track of Bank Fees

From the transactions tab (in the bank account where your fees were taken), Add a withdrawal transaction. Select “Adjustment-Out” as the type, and select “6075: Bank & Merchant Service Charges” as the account. Ensure the bank’s posting date is selected.

Wrap Up

If you had to undo a reconciliation or deposit slip before you got started, make sure to add the transaction back to the deposit slip or to reconcile the transaction when you are finished. 

All set!

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

Trust Transactions

Stop

If you haven’t, please read the “Before You Get Started” section before continuing with the instructions.

You may receive a retainer from a client or other form of deposit, and later have the check bounce, causing a withdrawal from your trust account. 

Original Transaction

1. Click on the Accounting Tab

2. Select the bank account with the affected transaction, and click  Details, or simply double-click on the bank account

3. Find the affected transaction, select it and click Action then select “Void Transaction”

4. Complete the form. In the Memo2 field, make sure you notate why you are voiding this transaction (i.e. “Bounced Check”). Click Save.

With this action, you have voided the original transaction and created a second entry to tell the system it’s been withdrawn. So, it records your bank’s reversal at the same time.

Keep Track of Bank Fees

If bank withdraws fees from your Operating Account, see above.

If bank withdraws fees from your Trust Account, record a withdrawal on your Admin Ledger (separate ledger or matter that you keep to house your personal funds kept in trust for fees or charges), using the type “Adjustment-Out” to notate the bank fee. Ensure the bank’s posting date is selected, and that you’ve added a note explaining the withdrawal. 

Wrap Up

If you had to undo a reconciliation or deposit slip before you got started, make sure to add the transaction back to the deposit slip or to reconcile the transaction when you are finished. 

All set!

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

Updated on August 17, 2018

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