Journal Entry for the Dishonor of a Check: Accounting Procedures and Best Practices

When a check is dishonored for various reasons such as insufficient funds or a closed account, it is important to accurately reflect this in your accounting records. The dishonor of a check typically involves reversing the original entry made to record the receipt of the check. This article provides a detailed guide on how to record the dishonor of a check, including examples and considerations for fees.

Understanding Cheque Dishonor

A dishonored check occurs when a financial institution (such as a bank) rejects the payment due to insufficient funds, a closed account, or any other reason. Recording the dishonor correctly ensures accurate financial statements and compliance with accounting standards.

Example Scenario

Consider a business example where a customer provided a check for $1,000. Initially, the business recorded the transaction as follows:

Original Entry: Debit: Cash $1,000; Credit: Accounts Receivable $1,000.

However, if the check is later dishonored, the accounting entry needs to be reversed. Here's how the journal entry for the dishonor should be recorded:

Journal Entry for Dishonor: Debit: Accounts Receivable $1,000; Credit: Cash $1,000.

Explanation: The entry reinstates the receivable since no cash was actually received, and it removes the cash from the books because the check was not honored.

Including Bank Fees

If there are associated bank fees due to the dishonored check, the accounting entry should also include the bank fees. The example below illustrates this scenario:

Journal Entry Incl. Bank Fees: Debit: Accounts Receivable $1,000 Credit: Cash $1,000 Debit: Bank Fees Expense $30 Credit: Cash $30

Explanation: The first part of the entry reverses the original cash receipt. The second part records the bank fees incurred, which are debited as an expense and credited as a cash outflow.

Reverse the Original Entry if Posted

It is crucial to reverse the original entry if it has already been posted to the accounting system. The following is an example of the entry to reverse the original cash receipt:

Reverse Entry: Bank (Dr.) 1,000 To Person / Expenses (Cr.) 1,000

Note: If no entry was posted at the time of receiving or depositing the check and only a memorandum was maintained, then no entries are necessary for the reversal.

Summary of Recording Dishonor of a Check

1. **Reverse the original entry: Debit the account receivable and credit cash to return the balance to its pre-receipt state.

2. **Record any additional costs associated with the dishonor, such as bank fees.

3. **Ensure that the amounts and accounts are adjusted according to your specific situation and accounting practices.

Additional Tips:

Keep accurate records of all transactions and cross-check with bank statements. Communicate with the customer to resolve the dishonored check issue. Regularly review and update accounting procedures for efficiency and accuracy.

By following these guidelines, businesses can maintain accurate and organized financial records, ensuring compliance and transparency in their accounting practices.