Non-sufficient Fund (NSF) Checks refer to the status of checking accounts that do not have enough money to cover transactions. It is described as the fee charged when a check is represented but cannot be used by the balance in the account. They are also referred to as bounced checks. If the bank receives a check that is not cashable (i.e. it does not have sufficient funds to be cashed), banks can choose to refuse payments and charge the account holders with an additional fee.
Therefore, it can be seen that NSF Checks are the checks that are received by the company deposited to the bank, but the bank later returns the check back to the company as a result of the checking account not having sufficient balance.
In this case, the company needs to make proper journal entries in order to account for the NSF checks to correct the balance between the book balance, and the balance at the bank. Issues pertaining to NSF Checks is mostly highlighted at year-ends, or when the company prepares bank reconciliation statements.
NSF Checks and Bank Reconciliation
Bank reconciliation can be defined as a document that compares the cash balance on the balance sheet of the company with the corresponding amount available on the bank statement of the company. Bank reconciliation is considered as an important step, primarily because of the fact that it helps organizations to identify any accounting changes if needed. They are then compiled at regular intervals in order to ensure that the cash records of the company is correct and properly reconciled. Hence, they act as a preventive measure against any fraud or cash embezzlement within the company.
There can be numerous reasons for differences between the balance on the cash book, and the balance as per the bank reconciliation system. These reasons are as follows:
- Deposits in transit: These are the deposits that have already been debited by the company; however, such deposits have not yet been credited by the bank.
- Outstanding checks: These are the checks that have been sent out to the suppliers, but they have not yet been presented in the bank. Therefore, the company has credited the amount, whereas the bank has not yet debited, since the check has not yet been presented. This results in a difference between both the balances.
- Bank service fee: Banks normally deduct charges for any services provided to customers. These charges (breakdown and amounts) can only be confirmed when the bank statement has been issued.
- Interest income: Interest income received in a checking account might not be debited by the account holder. This information can only be ascertained once the bank statement arrives.
- Non-sufficient funds: NSF Checks are checks that are deposited in the bank but cannot be honored because of unavailability of funds. Therefore, the check returns or bounces.
In order to reconcile the bank balance between the bank statement and the balance as per the company records, the company needs to deduct the amount of NSF Checks from their balance, so that it can be reconciled and duly adjusted with the balance as per the cash book. All other reasons for differences in the cash book balance and balance as per the bank statement should also be reconciled and duly adjusted.
For example, deposits in transit should be added back, whereas any outstanding checks should be deducted from the
Accounting Treatment for NSF Checks
Bank reconciliation requires the company to compare the internal cash books with the books that have been bank statements that has been issued by the bank. When comparing both of them, it is rudimentary to have a proper account of NSF Checks, since they will be required by the company when preparing bank reconciliation. This is to ensure that the balance as per cash book and the bank statement is properly adjusted for.
When the customer pays a check that is deposited in the bank account, the normal procedure is to debit the cash account and credit the Accounts Receivable account. This is to represent the influx of cash, and settlement of the customer account. The journal entry to record this is as follows:
| Account | Debit | Credit |
| Cash | xxx | |
| Accounts Receivable | xxx |
On the contrary, when there is an NSF check, it implies that the amount is still unsettled since the check was not cleared. Therefore, the entry previously made to write off the Accounts Receivable amount needs to be reversed. In order to do this, the following journal entry is made:
| Account | Debit | Credit |
| Cash | xxx | |
| Accounts Receivable | xxx |
The journal entry above represents that because of the unavailability of funds, the receivables need to be added back by the company.
Example of NSF Checks
The concept of NSF Checks is illustrated in the following example:
Kami Co. is a manufacturing concern that sells stationery products on credit to various different retailers. During the year ended 31st December 2021, they had outstanding accounts receivables of $5,000. Total sales during the year amounted to $50,000, out of which $45,000 was received in checks, which were subsequently deposited in checks.
The bank balance as of 31st December 2021 amounted to $20,000. However, as per the bank statement sent by the bank, the balance was $10,000. The bank also communicated about the NSF checks equivalent to $10,000 to Kami Co.
In the scenario mentioned above, it can be seen that Kami Co. sold goods equivalent to $50,000 during the year ended 31st December 2021. In order to record this, the following journal entries were initially made:
| Account | Debit | Credit |
| Cash | $45,000 | |
| Accounts Receivable | $5,000 | |
| Sales | $50,000 |
However, after discovering about the NSF Checks, it can be seen that there is a need to add back the accounts receivables that were previously settled. In order to record this transaction, the following journal entries will be made:
| Account | Debit | Credit |
| Accounts Receivables | $10,000 | |
| Bank | $10,000 |
Using this transaction, it can be seen that the bank balance will automatically reduce by $10,000, thereby reconciling both, the bank statement, as well as the bank reconciliation statement.