Failed payment to contractor

Create a deposit in the checking account and use a clearing expense account as the source account for the deposit

then make the payment to the vendor and use that same clearing expense account as the expense for the payment

the clearing expense account will then be zero.  When you reconcile mark off the clearing expense account transactions, deposit and expense against each other

Hi Rustler, 

Thank you very much for your feedback. Just to be clear - I have an uncategorized transaction in the bank feed (the money that was returned due to an incorrect bank account number). I am not sure how to create a clearing account and it could be used in this scenario described above?

Thank you!