What is the journal entry to record an NSF check, from J. Smith for $250, that is returned with the bank statement?
a. Cash $250 DR; NSF Check $250 CR
b. Accounts Receivable $250 DR; Cash $250 CR
c. NSF Check $250 DR; Accounts Receivable $250 CR
d. Cash $250 DR; Accounts Receivable $250 CR
e. Cash $250 DR; Miscellaneous Expense $250 DR
The correct answer and explanation is :
The correct journal entry to record an NSF check from J. Smith for $250 that is returned with the bank statement is:
b. Accounts Receivable $250 DR; Cash $250 CR
Explanation:
When a company initially receives a check from a customer like J. Smith for payment on an account, the usual entry is to debit Cash (or Bank) and credit Accounts Receivable. This increases the company’s cash balance and reduces the amount the customer owes.
However, when the bank returns the check as NSF (Non-Sufficient Funds), it means the customer’s bank account did not have enough money to cover the check. The bank will deduct the amount of the check from the company’s bank account. This requires an adjustment to the accounting records.
Cash Account: Since the bank is taking the money back out of the company’s account, the company’s Cash balance decreases. To decrease an asset account like Cash, you must credit it. Therefore, Cash is credited for $250.
Accounts Receivable Account: The customer, J. Smith, did not actually pay the $250 because the check bounced. They still owe the money. The original entry that credited (reduced) J. Smith’s Accounts Receivable balance needs to be reversed for this amount. To show that J. Smith now owes the $250 again, you must increase their Accounts Receivable balance. To increase an asset account like Accounts Receivable, you must debit it. Therefore, Accounts Receivable is debited for $250.
This entry effectively reverses the impact of the bounced check, reducing the Cash balance to reflect the bank’s deduction and reinstating the amount owed by the customer in Accounts Receivable, allowing the company to pursue collection efforts from J. Smith. While the bank might also charge a service fee for the NSF check, that fee would be recorded with a separate debit to Bank Service Charges or Miscellaneous Expense and a credit to Cash. The entry shown above deals only with the $250 principal amount of the bounced check.