Returned payments and failed collections

A returned payment is money that looked settled and then came back. On the sales side it is a customer’s Direct Debit that the payer’s bank refused, or a card payment that failed or was reversed. On the purchase side it is your own bank transfer to a supplier bouncing back a few days later because the account was closed or the details did not match. In both cases the bookkeeping goal is the same: the invoice must be open again, and the bank account must show the money in and out without anything landing in income or expenses by accident.

How collections are set up and matched in the first place is covered in direct debits and standing orders. This page starts at the moment the money comes back.

Reasons you will see

Your Direct Debit provider or bank reports a reason with each unpaid collection. The common ones are:

• Insufficient funds (“refer to payer”): the customer’s bank would not pay. Often fixed by retrying after the customer’s pay day.
• Instruction cancelled: the customer cancelled the mandate. A retry will fail; you need a new mandate or another payment method.
• Account closed or transferred: the details are dead. Ask for new ones.
• Indemnity claim: the customer asked their bank for a refund under the Direct Debit Guarantee after the money was collected. Treat this as a dispute, not a technical failure.

Card failures are simpler: a declined payment never settles, so there is nothing to reverse unless you had already marked the invoice paid. A completed card payment that the customer later disputes with their card issuer is a chargeback, which has its own process; see chargebacks and disputed card payments.

When a customer’s payment comes back

Suppose a customer paid invoice 2041 for £1,440 by Direct Debit. The provider’s payout on the 3rd included it, and it was matched in the bank feed. On the 8th the provider reports it unpaid and nets £1,440 off the next payout.

1. Reverse the receipt, do not delete it. Post a negative receipt or “unpaid” entry of £1,440 against the customer and invoice 2041, dated the day the money left your account. Invoice 2041 shows £1,440 outstanding again, and the bank reconciliation still agrees because both movements are recorded.
2. Leave the sale and the VAT alone. Under normal accrual VAT accounting the output VAT was due when you invoiced, so a failed payment changes nothing on the VAT return. If you use the cash accounting scheme, a receipt counted on a return that later bounced reduces output VAT in the period it bounces.
3. Record any fee. If the provider or bank charged an unpaid-item fee, post it to bank charges. The bank charges and interest page covers the VAT position of those fees. Only add a fee to the customer’s account if your terms say you will.
4. Add a note to the customer record with the reason code and date, then hand it to credit control.

If the provider nets the failure off a later payout, the bank line you see is smaller than the sum of the collections. Match the payout to its individual collections and the failure line from the provider’s report, rather than forcing the difference into suspense. The matching bank feed entries guide explains split matching.

Chasing after a failure

A retry is reasonable for insufficient funds; for a cancelled mandate it only creates a second failure. Contact the customer the same week, confirm the amount and ask how they will pay. Repeated failures from the same customer are a credit signal worth acting on: move them to payment in advance or a shorter limit under your credit control routine. For business customers, the statutory right to late payment interest and compensation under the Late Payment of Commercial Debts (Interest) Act 1998 runs from the original due date, not from the failed collection.

When your payment to a supplier comes back

A returned outgoing payment usually arrives a few working days after the payment run as a credit on the bank statement, sometimes with a reference such as “returned” or the supplier’s name. Treat it as the reverse of the original payment:

• post it against the supplier and the bill it paid, so the bill shows as unpaid again;
• for international payments, the amount that comes back may be less than you sent because intermediary banks deducted charges; record the shortfall as a bank charge, not as a part payment to the supplier;
• do not pay the bill again until you know why the first payment failed.

The bank detail warning sign

A payment that bounces because “the account does not exist” is often innocent: a typo, or a supplier that has switched banks. It is also the moment fraudsters exploit. An email arriving shortly afterwards with “our new bank details” should be treated as suspect until you have phoned the supplier on a number you already hold, not one in the email, and confirmed the change. Your bank’s Confirmation of Payee check on the new details is useful, but it is not a substitute for that call. The checks for setting up and changing supplier bank details are on supplier onboarding and master data checks.

Weekly review

If unpaid collections keep slipping past your month end, an accounting system that shows reopened invoices on the debtor list the same day helps. As a Nexbal beta user you can send reminders and match payments from uploaded bank statements on your own customer ledger.