How to record a returned deposit on a bank reconciliation

A returned deposit arises when a company deposits a check with its bank, and the bank refuses to deposit the related amount of cash in the company's bank account. This can happen for the following reasons:

  • The bank on which the check was originally drawn rejects the check. This happens when the account on which the check was drawn contains less unencumbered cash than the amount stated on the check.
  • There is an error on the check, such as a missing signature, date, payee name, or amount.
  • The check was drawn on a bank located in another country, which usually results in an automatic rejection.

Whenever a deposit is returned, the bank does not include it as a source of cash on the month-end bank statement that it sends to the company. If the company had already recorded the deposit in the cash account in its own records (as is virtually always the case prior to making a bank deposit), it must reverse this deposit in its own records. Otherwise, the book balance of cash will be higher than the bank balance of cash, with the difference being the amount of the returned deposit.

The reversal of the deposit is typically handled through the cash receipts module of the company's accounting software, which will credit the cash account and debit the accounts receivable account (assuming the related check payments were for outstanding invoices due from customers).

In addition, the bank will probably charge a service fee related to the returned deposit, though this amount may be rolled into the total service fee for the month. The company must record the service fee as a credit to the cash account and a debit to an expense account.

The collections staff should be made aware of all returned checks, so that they can immediately contact the related customers to ensure that replacement payments are made.

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