How to Handle Returned Checks

How to Handle Returned Checks

CAUSE: After a business deposits a check to a bank, it may be returned to the business because the person/company that drafted the check did not have enough funds in their account to cover the check. The person/company still owes money to the business.

RESOLUTION: Below are two options that you can use to Handle Returned Checks. Both methods are acceptable, depending on the customers needs.

OPTION ONE:
Use this option if you want A/R to show the check on the customer's A/R account.
SETUP ONE:

1. Set up Product Category for Returned Checks in Inventory

2. Set up a service Item Number for Returned Checks

3. Set up a G/L Account (expense) for Returned Checks in General Ledger.

4. Set up the system accounts transaction code in A/R Product Category and SL-sales code. Drive them to the new G/L account # for returned checks.

PROCEDURE ONE:

1. Create an Invoice in Inventory using the returned check item number for:

   1. The amount of the returned check,

   2. Using the same returned check item #, include the $ amount of the service charge on the returned check.

   3. The total invoice amount will equal the returned check amount plus any service charge.
      Make a manual bank withdrawal for the amount of the check and code it to the G/L returned check account #.

2. If the bank charges a service charge, than create another manual withdrawal for the amount of the bank charge and code it to the G/L account for returned checks.

   1. This will create an invoice in A/R for that returned check plus any service charges. You will then just create a receipt in A/R and apply it to the invoice when the customer pays the business back for the returned check.

OPTION TWO:
This is another way of handling returned checks when you don't want to create an A/R invoice. This is what many convenience stores use. Most of their invoices are cash customer, they do not have individual name ID's set up so are not able to create the invoice as shown above.
SETUP TWO:

1. Create a bank code for returned checks in the Bank Package.

2. Set up a G/L Account (expense) for Returned Checks in General Ledger.

3. Set up the system accounts transaction code in Bank for the new bank code. Drive it to the new G/L account # for returned checks.

PROCEDURE TWO:

1. When you get a returned check, you create a transfer from the deposit bank to the returned check bank.
   You have the checks in hand to verify the amount that is in your returned check bank account.

2. Once you receive the funds on the returned check you do a transfer from the returned check bank back to the deposit bank.

3. To handle the service charge, you just create a manual entry to the deposit bank and code it to the general ledger account for returned check fees.