What is a Returned Check?

A returned check is a check that is not paid by the financial institution on which it was drawn. The party that initially received this check and cashed it must reverse the transaction in its accounting records once it has been notified by the bank. This party may also be charged a fee by its bank.

Example of a Returned Check

A customer, John Doe, issued a check for $500 as payment for an invoice. The seller deposited the check, but it was returned due to insufficient funds. The seller had initially recorded the payment as an increase of $500 in its cash balance, accompanied by a $500 reduction of its accounts receivable balance. When the check was returned by the bank, the seller reversed this entry, leaving the full amount of the original invoice outstanding.

Reasons for a Returned Check

The usual reason for a returned check is that the account on which it was drawn does not contain enough funds to pay for the full amount of the check. Other reasons for a returned check are as follows:

The check is drawn on a foreign account
The check has been disfigured, so that payee, account, or payment information cannot be discerned
The check contains a mismatch between the numeric and written amount to be paid
The check was presented for payment too long after the check date, rendering it void
The check maker issued a stop payment order that blocks payment on the check
The checking account on which the check was drawn was closed