Guides

Handle dishonored cheques

A dishonored cheque (or check or bank draft, according to local usage) has been presented for payment or deposited into a bank account but rejected or returned by the bank. Typical reasons include:

  • Insufficient funds
  • Closed account
  • Improper, incomplete, or illegible drafting
  • Cheque drawn on bank outside the receiving bank’s processing network
  • Forgery

In most cases, a dishonored cheque has already been recorded in Manager. Frequently, the cheque was a receipt against an outstanding sales invoice. Three courses of action are available. Which is most suitable depends on several factors, including:

  • Reason the cheque was not honored
  • Prospects for eventual, satisfactory payment
  • Processing practices of your bank
  • Local banking regulations
  • Accounting standards and practices followed by your business
  • Use of accrual or cash basis accounting

The three options, in order of increasing complexity, are:

  • Leave the cheque in Pending status
  • Delete the transaction
  • Reverse the transaction

Leave in Pending status

When a cheque is dishonored because of an honest mistake and can be resubmitted, the easiest course of action is to leave its Status on the receipt entry form within Manager as Pending:

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After whatever problem preventing clearance of the cheque is resolved and the cheque is accepted by your bank, update Status to Cleared and enter the optional date of clearance:

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This situation is equivalent to entering a received cheque into Manager but waiting several days before actually depositing it into your bank.

Notes
This option cannot be used if the cheque was presented for cash and received into a cash account. Cash accounts do not include transaction status options in the Receipts & Payments tab.

This option can be used only if:

  • Local banking practices allow dishonored cheques to be resubmitted, AND
  • Your bank does not record the dishonored cheque before returning it or notifying you of the problem.

Example
Brilliant Industries receives and records a cheque from Lumen Lighting for a sales invoice. Brilliant immediately records and deposits the cheque into its bank account. However, because of a bank holiday, earlier deposits by Lumen into its own bank account were not processed as expected. By coincidence, Brilliant and Lumen use the same bank. The cheque is dishonored due to insufficient funds. But the bank is able to determine the cheque is not good before processing it. So it returns the dishonored cheque to Brilliant without recording it.

Brilliant and Lumen have a long business relationship, and Lumen assures Brilliant’s accounting staff that funds are now available. Brilliant leaves status for the receipt as Pending and resubmits the cheque to the bank. When the cheque clears successfully, Brilliant updates the status.

Delete transaction

Receiving an invalid cheque is like receiving no payment at all. You might decide to delete the receipt recording such a dishonored cheque entirely. This will leave any balance in Accounts receivable as it was before the receipt was recorded.

Notes
This option can safely be used for cheques presented for cash.

This option can be used for a cheque deposited to your bank only if the cheque has not been recorded by your bank.

This option is most attractive when using cash basis accounting, because you will not want to recognize income you have not collected.

Example
Brilliant Industries receives and records a cheque from a new customer. But when the cheque is presented to the bank for deposit, the bank detects it as a forgery. The cheque is not processed. Bank regulations require the bank to destroy it.

Brilliant deletes the receipt from its records. Further investigation reveals the customer is bankrupt and no longer in business. Brilliant writes off the associated sales invoice as a bad debt.

Reverse transaction

The most complex option and, unfortunately, the most common is reversing the transaction.

Caution
Reversal is required whenever your bank records a cheque before dishonoring and reversing it. Unless you reverse the original transaction, your records will not match your bank statement, leading to potential reconciliation and audit problems.

To reverse receipt of a dishonored cheque, go to the Receipts & Payments tab. Select New Receipt :

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Complete the receipt form exactly as you would for an incoming receipt, but enter the Unit price as a negative number on all line items. Select the same tax codes and tracking codes used on the original receipt (if any). Most importantly, post the reversal to the same account(s) as the original receipt.

Note
A convenient short cut, especially when there are multiple line items on the original receipt, is to View and Clone the original, but edit all unit prices to be negative before clicking Create.

Example
Brilliant Industries deposits a cheque from Bob’s Hardware for sales invoice #6, recording the receipt as below:



After the deposit is recorded to Brilliant’s account by the bank, the cheque is dishonored for insufficient funds. Brilliant’s bank subtracts the deposited amount from Brilliant’s account. The bank does not return the dishonored cheque, following its standard practices.

Brilliant clones the original bank receipt and edits the clone by making the unit price negative and adjusting dates. It also edits the description to explain the transaction:



The customer’s Accounts receivable balance is restored to what it was prior to entry of the dishonored cheque:

Handling bank fees for dishonored cheques

Most banks assess fees when cheques are dishonored. Such fees represent completely separate transactions between your business and your bank. They must be entered as separate bank payments, naming the bank as payee and posting the fees to an appropriate expense account, such as Bank fees.

If you are able to charge the issuer of the dishonored cheque for the fees, issue a separate sales invoice. Do not attempt to combine the new transaction with the original sales transaction or a reversal.

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