Dishonored Cheque Journal Entry

Dishonored cheque is the cheque that company receives from a third party to settle for payment but the bank rejects to withdraw money due to various reasons. The most common reason for the dishonored cheque is the issuer does not have enough balance in the bank account.

Cheque is the payment order that account owner instructs the bank to pay a specific amount to the exact person from his account. The account owner needs to have enough balance to allow the bank to withdraw money and pay to the cheque holder. The bank needs to inspect the cheque to ensure it is really from the account owner, they will not withdraw money from an account without the proper authorization of the owner.

The bank will return the cheque to the holder if the owner does not have a balance to withdraw. They will ask the holder to contact the cheque owner to refill the cash balance.

A non-sufficient funds cheque is a serious issue that may face a criminal charge. It is an indication that the issuer is trying to scam the cheque holder. If the issuer does not take proper action to make a legitimate payment to the holder, the holder can use the cheque to sue at the court.

The bank also takes serious action against the account holder who issues a cheque without enough money. It will impact the bank’s reputation as the holder may not understand the process and accuses the bank of not making proper payment. The bank may penalty the account owner for issuing a cheque without enough cash. A repeated mistake will lead to the termination of bank account. It may depend on the bank policy.

Dishonored cheque journal entry

When the company receives cheques from customers or other parties, they need to debit cash which is the current asset on balance sheet. The credit side can be accounts receivable if the customer settles the previous balance. Some customers use cheques to pay for goods or services, so the credit side will impact company revenue.

However, when the bank decline to make payment, it means the cheque is just a piece of paper without any value. So the company needs to reverse back the cash received and accounts receivable.

The journal entry would be debiting accounts receivable and credit cash at bank.

This transaction will reverse back the cash that company records during the initial cheque receive and it also increases accounts receivable balance which is to be collected from the cheque owner.

Dishonored cheque journal entry Example

Company ABC is a shoe manufacture. In November, the company sold 10,000 units of shoes to company XYZ on credit. The selling price is $ 10 per unit.

On 15 November, XYZ issued a cheque of $ 100,000 to settle the outstanding balance. ABC accountant has recorded the transaction to eliminate the accounts receivable and deposit to the bank. Two days later, the bank return the cheque and confirm that XYZ does not have enough cash to withdraw. The bank returns the cheque and asks to contact the XYZ owner.

Please prepare the journal entry when the cheque is bound back from the bank.

When the ABC receives a cheque from XYZ, the accountant has record debit cash and credit accounts receivable.

But the cheque turns to be dishonored, so we need to credit cashback and debit the accounts receivable.

This transaction will decrease the cash from balance sheet and increase accounts receivable to collect from customer.