Double Entry for Dishonoured Cheques (Cambridge International AS Accounting)
Dishonoured cheques received from credit customers
Spec point — preparation of ledger accounts
What is a dishonoured cheque?
-
A dishonoured cheque is a cheque that has been returned by the bank
- This could be because the customer did not have the funds to cover the transaction
- Or it could be due to an error on the cheque such as a missing signature
-
This means that the money stated on the cheque has not been paid to the business by the customer
How do I record a dishonoured cheque in the ledger accounts?
-
A dishonoured cheque is recorded by making the same entries as when the cheque was received but on the opposite sides of the accounts
-
Credit the bank account in the nominal ledger
- This is because the bank account would have been debited when the cheque was received
- Credit the amount that is stated on the cheque
-
Credit the discount allowed account in the nominal ledger (if applicable)
- If a cash discount was given to the credit customer then this also needs to be balanced
- The discount allowed account would have been debited when the cheque was received
-
Debit the trade receivables' account in the sales ledger
- This is because the trade receivable's account would have been credited when the cheque was received
- The amount is added back onto the balance of the credit customer
- Debit the full amount of the transaction including any cash discount
| Book of prime entry | Account to debit | Account to credit |
|---|---|---|
| Cash book | Trade receivable's account | Bank account (and maybe the discount allowed account) |
Case Study Tina is a sole trader. Tina allows a 10% cash discount if goods are paid for within a month.
On 1 January, Dave buys goods on credit costing $500 from Tina. Tina records this by debiting Dave's account and crediting the sales account.
On 15 January, Dave benefits from the cash discount and sends Tina a cheque for $450. Tina records this by debiting $450 to the bank account and $50 to the discount allowed account. Tina balances this by making credit entries in Dave's account totalling $500.
On 22 January, Tina is notified by her bank that Dave's cheque has been dishonoured. Tina records this by crediting $450 to the bank account and $50 to the discount allowed account. Tina balances this by making debit entries to Dave's account totalling $500.
Here are how the entries appear in Tina's books.
Sales account
Date Details $** Date Details $ Jan 1 Dave 500 Bank account
Date Details $ Date Details $ Jan 15 Dave 450 Jan 22 Dave 450 Discount allowed account
Date Details $ Date Details $ Jan 15 Dave 50 Jan 22 Dave 50 Dave account
Date Details $ Date Details $ Jan 1 Sales 500 Jan 15 Bank 450 Jan 22 Bank 450 Jan 15 Discount allowed 50 Jan 22 Discount allowed 50
Dishonoured cheques issued to credit suppliers
Spec point — preparation of ledger accounts
What is a dishonoured cheque?
-
A dishonoured cheque is a cheque that has been returned by the bank
- This could be because the business did not have the funds to cover the transaction
- Or it could be due to an error on the cheque such as a missing signature
-
This means that the money stated on the cheque has not been paid to the supplier by the business
How do I record a dishonoured cheque in the ledger accounts?
-
A dishonoured cheque is recorded by making the same entries as when the cheque was received but on the opposite sides of the accounts
-
Debit the bank account in the nominal ledger
- This is because the bank account would have been credited when the cheque was issued
- Debit the amount that is stated on the cheque
-
Debit the discount allowed account in the nominal ledger
- If a cash discount was received from the credit supplier then this also needs to be balanced
- The discount received account would have been credited when the cheque was issued
-
Credit the trade payable's account in the purchases ledger
- This is because the trade payable's account would have been debited when the cheque was issued
- The amount is added back onto the balance of the credit supplier
- Credit the full amount of the transaction including any cash discount
| Book of prime entry | Account to debit | Account to credit |
|---|---|---|
| Cash book | Bank account (and maybe the discount received account) | Trade payable's |
Case Study Chris is a sole trader. Chris buys goods on credit from a supplier Daisy. Daisy allows Chris a 5% cash discount if he pays within a month.
On 1 May, Chris buys goods on credit costing $200 from Daisy. Chris records this by crediting Daisy's account and debiting the purchases account.
On 7 May, Chris benefits from the cash discount and sends Daisy a cheque for $190. Chris records this by crediting $190 to the bank account and $10 to the discount received account. Chris balances this by making debit entries in Daisy's account totalling $200.
On 29 May, Chris is notified by Daisy that his cheque has been dishonoured. Chris records this by debiting $190 to the bank account and $10 to the discount received account. Chris balances this by making credit entries to Daisy's account totalling $200.
Here are how the entries appear in Chris's books.
Purchases account
Date Details $** Date Details $ May 1 Daisy 200 Bank account
Date Details $ Date Details $ May 29 Daisy 190 May 7 Daisy 190 Discount received account
Date Details $ Date Details $ May 29 Daisy 10 May 7 Daisy 10 Daisy account
Date Details $ Date Details $ May 7 Bank 190 May 1 Purchases 200 May 7 Discount received 10 May 29 Bank 190 May 29 Discount received 10
Was this revision note helpful?
Build on this topic