Check fraud is no longer a rare exception — it is a growing operational and financial risk for community banks. When a fraudulent check clears, the first question is often who is liable: the customer, the bank, or another party in the collection chain.
The answer depends on the facts, including whether the bank exercised reasonable care, whether the customer contributed to the loss, and how quickly the issue was discovered and reported.
Beyond liability considerations, it is equally important to understand the proper accounting treatment when a fraud event occurs.
Below are common scenarios and the corresponding journal entries banks typically record:
1. The fraud loss to the bank is both probable and estimable — the bank should record an expense, even if insurance will cover it later:
- Debit (Dr.). Fraud loss expense
- Credit (Cr.) Cash/due from banks
2. The fraud loss to the bank is both probable and estimable, but is not fully finalized (still under investigation):
- Dr. Fraud loss expense
- Cr. Accrued liability
3. The bank filed an insurance claim on the fraud loss (not yet received):
- Dr. Insurance receivable
- Cr. Other income (or reduction of expense)
Then, once the insurance cash is received:
- Dr. Cash
- Cr. Insurance receivable
For more information about determining check fraud liability and the related accounting treatment, reach out to a Pinion advisor for further assistance.
You can also check out the following link: UCC Check Fraud Liability: Bank vs. Customer Negligence – LegalClarity
