What it means
The mechanics catch people out because a deposited check looks like money before it really is. The bank credits the account provisionally, and if the paying bank later refuses to honour the item, the credit is reversed and the funds vanish from the balance, sometimes days after the payee has already shipped goods.
There is more than one reason for a return. Insufficient funds is the most common, but accounts are also closed, payments stopped, signatures mismatched, amounts written inconsistently in words and figures, and checks presented after they have gone stale-dated.
The cost is more than the face value. The bank charges a returned item fee, staff spend time on the chase, and any goods already despatched may be gone for good, which is why businesses that take checks usually charge the customer a returned item fee of their own.
The accounting treatment is a simple reversal. You credit the bank account for the amount originally recorded and reinstate the trade receivable, putting the balance straight back into the ageing report so it is chased like any other overdue debt.
Prevention is mostly about not relying on checks for risky transactions. Higher-value or first-time customers can be moved to bank transfer or card, deposits can be taken before despatch, and repeat offenders can be put on a cash-in-advance basis without much argument.
In practice
Real-world examples.
Example
A landscaping business deposits a $4,800 check from a residential client and pays its crew the next day. The check bounces for insufficient funds, the bank reverses the credit, and the business ends the week overdrawn and paying its own overdraft charges.
Example
A wholesale grocer receives three returned checks in one month from the same restaurant customer. It moves the account to prepayment, recovers two of the three amounts, and writes off the remaining $1,150 as a bad debt.
Example
A car repair shop takes a check that is returned because the signature does not match the bank's records. The customer is unaware, re-signs a fresh check the same day, and the shop absorbs only the $30 bank fee.
Formula
Calculation
Total cost of a bad check = face value at risk + bank returned item fee + internal handling cost - fee recovered from the customer
A building supplies merchant accepts a check for $3,200 from a small contractor and releases the materials the same day. Nine days later the check is returned unpaid and the bank charges a returned item fee of $35.
Two hours of credit control time at a fully loaded cost of $40 an hour adds 2 x $40 = $80 of internal handling cost. If the amount is never recovered, the total write-off is $3,200 + $35 + $80 = $3,315.
If instead the contractor pays the $3,200 by bank transfer a week later and also pays the merchant's own $40 returned item charge, the net cost of the incident is $35 + $80 - $40 = $75. The difference between $3,315 and $75 is why merchants chase these items immediately rather than at month end.Case study
Seen in the real world.
Ridgeline Building Supplies is an invented company used purely as an illustrative example. It served small contractors and had always accepted checks on delivery, treating them as good as cash because most of its customers were long-standing local trades.
Over one difficult winter, seven checks totalling $18,400 came back unpaid, and by the time the credit controller noticed the pattern, four of those customers had stopped answering the phone. Adding bank fees of $245 and roughly thirty hours of chasing time, the incident cost about $19,845 before recoveries.
Ridgeline kept accepting checks but changed the rules around them: no goods released against a check above $1,000 until it had cleared, an automatic $40 returned item charge written into its terms, and any customer with two returns moved to prepayment. Returned check losses fell to under $2,000 the following year. The illustrative lesson is that the fix was a policy change, not a payment technology change.
Watch out
Common mistakes.
- Treating a deposited check as cleared funds. The provisional credit can be reversed for several days after deposit, so releasing goods on the strength of it is effectively unsecured lending.
- Leaving the reversal sitting in a suspense account. The amount belongs back in trade receivables and in the ageing report, otherwise nobody chases it.
- Redepositing a check repeatedly without contacting the customer. Banks limit how often an item can be presented, and each attempt usually adds another fee.
Questions
People also ask.
What is the difference between a bad check and a post-dated check?
A post-dated check carries a future date and is simply not yet payable, whereas a bad check is one that has been presented and refused.
Can a business charge a fee for a returned check?
Yes, provided the charge is set out in its terms and conditions and is a reasonable reflection of the cost incurred, which is why most trading terms name a specific amount.
Is writing a bad check a crime?
Knowingly writing a check on an account without funds is a criminal offence in most jurisdictions, though an honest mistake corrected promptly is normally treated as a civil debt matter.
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