Key Concepts
A dishonoured cheque is a cheque received by a business that is later rejected by the bank. When a cheque is dishonoured, the business must reverse the original receipt entry.
Reasons a cheque may be dishonoured:
- Expired cheque (usually more than 6 months old)
- Post-dated cheque (dated in the future)
- Incomplete information (no signature, no date, no amount)
- Inconsistent information (amount in figures does not match words; signature differs from bank records)
- Payer's bank account has insufficient funds, is frozen, or is closed
When a cheque is dishonoured, the business must:
- Decrease cash at bank (since the money was not received)
- Increase trade receivables (the debt is restored)
- Withdraw any cash discount previously allowed (the payment did not go through, so the discount no longer applies)
A dishonoured cheque = reverse everything from the original receipt. Dr Trade receivables (restore the debt) / Cr Cash at bank / Cr Discount allowed (if a discount was given). The original entry is fully reversed.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 25 Mar | Cash at bank | 1,960 | |
| Discount allowed | 40 | ||
| Trade receivables — Faizal | 2,000 |
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 31 Mar | Trade receivables — Faizal | 1,960 | |
| Cash at bank (dishonoured cheque) | 1,960 | ||
| 31 Mar | Trade receivables — Faizal | 40 | |
| Discount allowed (withdrawn) | 40 |
Note:For any dishonoured cheque, always write Cash at bank (dishonoured cheque). If a cash discount was previously allowed, also write Discount allowed (withdrawn).
Effects of a Dishonoured Cheque
| Account | Effect |
|---|---|
| Cash at bank | Decreases |
| Trade receivables | Increases |
| Discount allowed | Decreases (withdrawn) |
| Profit | Increases only when a discount allowed was withdrawn — withdrawing the discount reduces expenses, so profit rises. If no discount was allowed on the original receipt, the dishonour has no effect on profit. |
Not withdrawing the discount allowed when a cheque is dishonoured. If a discount was given on the original receipt, it must be withdrawn (Cr Discount allowed) on dishonour.
Debiting Sales revenue instead of Trade receivables on dishonour. The customer's debt is restored — the debit goes to Trade receivables, not Sales revenue.