How do you account for returned checks?

From time to time, I get asked about the best way to handle returned checks. Let’s take a look at a couple things I always recommend.

Do post the returned check to the customer’s account

Some utilities choose not to post the returned check to the customer’s account, instead holding the check until the customer honors it with cash. This is a bad business practice for several reasons.

The history of past returned checks is often used to decide whether to continue accepting checks from a customer. If previous bad checks aren’t in the system, this becomes more difficult to determine. If your ordinances or policy allows for it, a history of returned checks can be reason to charge or increase a security deposit.

If the returned check isn’t part of the customer’s balance, it can be overlooked when charging late fees and selecting accounts for the cut-off list.

If you offer a fully integrated online bill pay system the customer can see their balance and honor the returned check with an online credit card payment.

Also, be sure you add the returned check fee to the customer’s account. This is just as much a part of what they now owe as the returned check itself.

Don’t reverse the original payment

Many billing systems go to all the trouble of reversing the original payment when a returned check is processed. With these systems, if a check is returned that was originally applied to services in multiple funds (for example, electric, water, and garbage), the system will debit the accounts receivable and credit the cash accounts in each fund.

I recommend using a single returned checks receivable account

Rather than doing all that, I recommend using a single returned checks receivable account. In a multiple fund environment, this is usually in the General Fund (following the theory that processing returned checks is a general administrative task). However, if your receivables are heavily skewed toward one of your enterprise funds, you could choose to put the returned checks receivable account in this enterprise fund.

Why use a returned checks receivable account?

The case for using a returned checks receivable account can be made for a couple reasons:

Reinstating the original accounts receivable technically isn’t a correct accounting practice because you did collect the bill, but the check bounced.

By tracking returned checks separately, you are maintaining a subsidiary ledger of all outstanding returned checks. At any point in time, adding up all your returned checks should agree with the balance of the retuned checks receivable account.

Need assistance?

If you have questions about processing returned checks or any other part of your office operation, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com to learn how a business review could help your utility.

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© 2015 Gary Sanders