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Cheques

Dishonoured Cheques

Sometimes cheques (checks) you receive may be dishonoured (bounced cheques) or returned for a variety of reasons. Accordingly there are different ways to capture this type of transaction. Cheques usually dishonour, bounce or get returned because of post-dating, lack of funds in the drawings account, stop cheque requests or insufficient or incorrect signatories.

For example, payment is often considered conditional on cheque clearance, so you might like to consider legal, legislative, and internal issues that impact your accounting. The following is an example for Capturing Dishonoured, Bounced or Returned Cheques:

  1. Delete the payment applied to the original sale that represents the dishonoured, bounced or returned cheque. Create a Purchase or Journal to represent the bank fee and flow of funds through your bank account for the original dishonour, bounce or return. Request a new payment from your customer or wait for their notification that the original cheque can be re-deposited. Create a Sale to charge your customer for dishonour, bounce or return. Add admin fees (if applicable). NOTE: This may not be suitable if you have already submitted tax or other regulatory information based on the entry.
  2. Close the original sale with a payment. Issue a new Sale Adjustment/Credit Note using the money reversed out of your bank to close it. Create a Sale to charge your customer for dishonour, bounce or return and admin fees (if applicable). TIP: Check with your advisor regarding whether this is an acceptable practice in your tax zone.
  3. Apply the payment received against your Sale. Enter a General Journal for the reversal the bank puts through to represent the money the customer now owes you again. For example, you could choose an account code such as Liability:Failed Settlements or Liability:Dishonoured Payments or similar. Use this account to track who owes you money for dishonoured cheques. Create a sale to charge your customer for dishonour and admin fees (if applicable).

NOTE: This method has the disadvantage of not tracking the liability against the actual contact in the Liability: Money Owed To Me account. However, it does keep the sale transactions clear of deletions or edits.

Cancel a Cheque (Check)

Lost or stolen cheques are valid while they haven't formally been cancelled through your banking institution. If you no longer physically hold the cheque (check) or it hasn't been destroyed, there is always a risk that it can be deposited maliciously or otherwise. This may occur even after you have re-issued another cheque in replacement for your supplier. A supplier won't necessarily check to see if you have already paid them so you need to cancel the cheque to be sure by notifying your banking institution (bank fees may apply).

If you have already claimed the expense in a tax filing/return, you can't just delete the transaction. You will need to use a method that will make an adjustment to your next accounting period which will reverse any tax previously claimed.

Cancelling a Cheque if it was in a Previous Tax Period

In this general journal example, the original cheque issued is reversed. This ensures your next tax remittance includes a 'reversal' of the previous GST credit. It also enables you to clear the undrawn cheque from your bank reconciliation.

  1. To start a new journal, select Add > Journal.
  2. Enter the first line to be a DEBIT entry for the Asset bank account you issued the cheque from. Don't select any tax code.
  3. Enter the second line to be a CREDIT entry for the Expense account you previously used when the original cheque was created. Select the same tax code as the original expenditure transaction or use a reversing tax code relevant for your zone.

Why can't I just delete the transaction?

Deleting a transaction means you have no record of it (in this case a cancelled cheque). So there are audit and business issues involved when doing this.

How long should I wait before cancelling a cheque?

Any lost or misplaced undeposited cheque is risky. You may be vulnerable to fraud such as revealing your signature or leaving open the possibility of a copy or counterfeit cheque being created in its place (each cheque has a unique number series). Consequently, it's a good idea to review uncleared cheques at financial year end. Better still, you should do this at the end of your regular accounting period to see whether you can clean things up.