You might receive a check which gets deposited into the bank, and a few days later may bounce. During that time, you likely applied that check to one or more invoices. 


This article will walk you through how to undo those payments, but still, account for the check as it was deposited, and later withdrawn by the bank. 


Note: These instructions are for Operating Bank Deposits only



This requires two different operations, first to reverse the invoice payments, then to properly post the bad check amount and any fees.

  1. All payments will have to be unlinked from the invoices as in actuality the invoices were never paid.  To do so, select one of the paid invoices, click edit and then "Generate" to unlink the payment (you will see a warning letting you know the payment is unlinked, just click Yes). Do that for all invoices which were paid with the bad check. You will end up with an Operating retainer for that matter. We will address that in a moment. 
  2. If this deposit was grouped on a deposit slip, you will need to remove this transaction from the slip (don't worry about the deposit slip amount as it will be corrected in a few steps). Go to Accounting > Bank > Operating Bank > Details > Deposit Slips. Edit the slip in question and UNCHECK the bad check deposit.
  3. Remove the deposit from the client. Within that matters details, go to the Transactions tab. Select the Operating Bank from the Bank drop-down. Locate that bad check deposit and delete it. This will eliminate that Operating Retainer.


This takes care of reversing the client funds/bill payment.  Now you must repost the deposit and its reversal for your deposit slip & reconciliation. To do so, follow these steps:

 

  1. Create a new account in the Chart of Accounts as an income account “Bounced Check and Reversal”.  (Your accountant may prefer this to be an expense account)
  2. Make a deposit in the operating account. Since this will not be linked to the matter, be sure to make some notes and use the actual data from the original check (i.e. date of deposit, who paid, actual check number, NSF, etc) Post to the newly created "Bounced Check and Reversal" Account. This should be done under Accounting > Bank > Operating Bank > Details > Transactions
  3. If a deposit slip was originally used, add this transaction to the original deposit slip. You can do so by going to the Deposit Slip tab (same area), locating the slip, clicking edit and checking this newly added deposit. 
  4. Now you need to account for the bank removing those funds. Go back to the transactions tab (same area) and enter a new transaction using “Adjustment-out” to account for the money taken out by the bank. Use the date the transaction was reversed in the bank and the client’s check number in the reference area and enter memo with notes/reasoning. Post this to the same "Bounced Check and Reversal account.



Lastly, you must account for the bank fee that likely came with the bounced check. 

  • If charging the bank fee to the client: create a hard expense associated with the client matter, using the date posted by the bank.  Be sure to properly notate the expense
  • If the firm is absorbing this cost: post as “adjustment out” to 6075: Bank & Merchant Service charges using the bank’s posting date.


Now all client balances are correct, invoices are unpaid, and the transaction is accurately reflected on the deposit slip and when the bank account is reconciled.