Reconciling the Bank Statement , Page 10

Problems while Issuing a Check

Today, most business transactions are performed through banks. For such transactions, checks are usually written, received, and deposited. As long as a proper check is made, dated, and there are sufficient funds in the account, there are no problems.

However, problems arise when there is: 

• A stop payment on a check 
• A not sufficient fund (NSF) check 
• A future dated check

Stop Payment on a Check:

The stop payment order should be issued before the check is presented for payment, or you cannot perform this action. To issue a stop payment on a check, the depositor needs to order the bank not to pay or honor the specific check issued to the client. The clerk has to mark ‘stop payment’ on the check stub. Then the accountant adds the stop payment check amount in the next check.

A stop payment order is generally issued when the check is lost or is written to a wrong recipient. Most banks charge fees for a stop payment order. The fee amount may be treated as miscellaneous expense and you can pass a journal entry for the expense.

Not Sufficient Fund (NSF) Check: 

The NSF check is called dishonored check or bounced check. If there is insufficient balance in an account, the banker returns the check to the depositor.

Once the bank returns the NSF check, the effects are incorporated in the account by: 

• Deducting the amount of the dishonored check from the checkbook balance. 
• Making a journal entry to record the returned check.

The business then informs the client about the insufficient balance and arranges to collect money from the client.

The following example illustrates the process to record a NSF check transaction:

On January 15, a check for $600 from Rex & Co. was deposited. However, the check was returned by the bank due to insufficient funds in the Rex & Co. Account.

Step 1: Analysis 

• Accounts Receivable is an asset account. 
• Cash in Bank is an asset account. 
• Account Receivable is increased by $600. 
• Cash in Bank is decreased by $600.

Step 2: Debit – Credit Rule:

• Debit Account Receivable for $600. 
• Credit Cash in Bank for $600.

Step 3: Make a Journal Entry

Journal Entry:                                                                                                         Page No. 5