Estimated reading time: 6 minutes
What does a Cheque Dishonoured Journal entry mean?
That means a reversal of the following:
- Recorded receipt (Cheque receipt) or
- Payment transaction (Cheque Issue).
Let’s learn journal entries for each of these scenarios.
Cheque Dishonoured Journal Entry Scenario I:
The entity pays its vendor by cheque.
The Journal Entry (JE) will debit the vendor and credit the Bank.
Entry when payment of liability occurs through the issue of a Cheque:
The entry below results in a decrease in Liability and bank balance.
JE, when the above Cheque results in dishonour:
If the Cheque issued by the entity gets dishonoured for insufficient funds, it increases the liability and bank balance.
Because of the dishonour entry, there is no liability, and the bank balance increases, resulting in the original entry’s reversal.
Runners Insight:
A Cheque is a form of Bank payment. As such, Bank GL is part of the Journal entry for any cheque-related transaction.
Cheque Dishonoured Journal Entry Scenario II:
The above example taught us about the journal entry for an issued cheque dishonour. Let’s see the Journal entry for dishonoured cheques from debtors(Cheque receipt).
JE when the debtor pays back to the entity through a Cheque (Bank Balance increases and receivable balance decreases):
JE, when the above Cheque receipt turns dishonoured:
Cheque dishonour results in penalty charges by the banker to the account holder who issues the Cheque. Therefore, Cheque dishonour does not change the Debtor and bank balances.
Also Read: NSF Check Entry
Examples:
Think of an entity, “ALL”, which purchased raw materials worth Rs. 200,000 from “Large” Company.
Large Company honors payment through a Cheque for the same amount. However, the Banker dishonours the Cheque due to insufficient balance.
Let’s record entries in the books of ALL
1. Entry for Purchase of Raw Materials
Here, Large Company is a Creditor. As such, it will be credited in the Journal entry to record the liability.
2. Journal Entry for Payment
3. Journal Entry for Dishonour of Cheque (Reversal of above JE 2)
The above entry nullifies the effect of the second entry. So, there is no change in the liability or bank balances.
4. Journal entry for the penalty charges by the Bank
These are penalty charges by the Bank for the dishonour of Cheques. Refer to this article as an example of charges levied by a bank
Frequently Asked Questions:
How do I record a Dishonour of a Cheque issued?
A Cheque dishonour results in recording a debit to the Bank and a credit to the liability.
Is it a dishonoured Cheque debit or credit?
If debtors give a cheque and it bounces, you credit the cheque to the journal entry.
If the cheque issued to the Creditor is dishonoured, then the dishonoured cheque is shown on the debit side of the journal entry.
Reasoning – Dishonouring of cheques results in no receipt of payment from the Bank. So, there is a reversal of the bank GL to nullify the effect of an initial payment or receipt journal entry. Refer to the 2nd and 3rd JE in the above ALL Company example
How is a Dishonoured Cheque treated in a bank reconciliation statement?
Bank Reconciliation is used to reconcile the bank balance per the books to the bank balance recorded by the Bank.
Banks note the cheque dishonor first. So, the entity records don’t reflect it, causing a variance. When the entity receives the bank statements, it records the reversal in its books. So, dishonoured cheques may come under reconciling items.
If a debtor’s cheque bounces, the amount is subtracted from the bank balance in the books; if a creditor’s cheque bounces, the amount is added to the bank balance.
These cheque dishonors do not occur frequently, as they downgrade the business’s credibility and liquidity.
Are the reasons for Cheque dishonour relevant?
The answer would not be relevant for accounting purposes.
However, it is relevant to the business as a whole. Informing top management of these transactions will help them take the necessary action. The reasons could be insufficient balance, stale cheque, mismatch of authorized signatory on cheque vs bank records, stop payments, etc.
Business Reason: It would negatively impact business dealings. Suppose the Cheque to the supplier (Payment) turns out to be dishonourable. In that case, the other party will have questions regarding the entity’s credibility and might not be willing to do further business.
Conclusion for Cheque Dishonoured Journal Entry
Cheque dishonour means the bank does not allow the Cheque for payment or receipt. This results in non-payment if that’s a payment to the supplier of goods or a non-receipt if the Cheque relates to a receivable. So, the resultant journal entry reverses the payment/receipt entry recorded.
If you pay suppliers by cheque and it bounces, you debit the bank and credit the liability account. If you receive a cheque from debtors and it bounces, you debit the receivable and credit the bank. Refer to the above example to glance at journal entries.
