Accounting Treatment Of Cheques
1. Cheques received from Debtors:
When we receive cheque from our debtor , we may adopt the following three options:(a) Deposit with bank.
(b) Endorse to a creditor.
(c) Encash over the counter of debtor's bank.
Deposit with bank
When a cheque is received from debtor, it may be deposited with the bank for collection from the debtor's bank after recording its details in Paying-in-slip Book. The bank will collect the amount of cheque from the concerned (debtor's) bank and credit it to the account of its customer. Suppose we receive a cheque from our debtor Mr. X for Rs. 1,000 on 5.6.2006 and deposit it into our bank for collection on the same date. The following entry will be passed in our books.
5.6.2006
Bank A/c..............................Dr. 1,000
Mr. X A/c.............................1,000
Note:
This entry shows increase in our bank balance (an asset) and decrease in our debtor (an asset).
But if for any reason be cheque cannot be deposited on the same day i.e. 5.6.2006, the cheque will be kept in cash box and will be assumed as a part of cash i.e. so cash A/c will be debited instead into bank. Suppose, the cheque received on 5.6.2006 , deposited on 8.6.2006. The entries will be:
5.6.2006
Cash A/c..............................Dr. 1,000
Mr. X A/c.................................1,000
(being cheque received)
8.6.2006
Bank A/c.............................Dr 1,000
Cash A/c...........................1,000
(being cheque deposit into the bank)
Generally the bank does not charge anything for this service (collection of our cheques). But if a cheque received from a debtors of a distant place (an outstation cheque), the bank charge something. The bank deduct his charges from the amount of the cheque and credit the net amount to our account and the following entry will be passed in our books, if the bank charges Rs. 10
10.6.2006
Bank Charges A/c......................Dr. 10
Bank A/c...........................10
(being collection charges deducted by the bank)
Note:
This entry shows increase in an expense and decrease in the bank balance (an asset). It means net increase in our bank balance is Rs. 990.
Endorsement to a creditor:
A cheque received from our debtors may be endorsed in favour of a creditor instead of depositing with a bank. In that case the name of the creditor will be written on the back of the cheque under our signature. this process is known as "Endorsement". By this the creditor becomes the legal owner of the cheque and its entitle to receive the amount of the cheque . For example, suppose we receive a cheque for Rs. 1,000 from a debtor Mr. Saleem on 10.1.2006. The entries will be:
10.1.2006
Cash A/c.............................Dr. 1,000
Mr. Saleem A/c........................1,000
(being cheque received)
12.1.2006
Mr. Asif A/c..................................Dr. 1,000
Cash A/c.......................................1,000
(being cheque endorsed)
Note:
On 10.1.2015, the cheque has not been deposited into the bank, rather it is kept in the cash box, so Cash A/c is debited. On 12.1.2015, when the cheque is taken out of the cash box and endorsed to Mr. Asif Cash A/c is credited. Thus the two entries show decrease in debtors (asset) and decrease in creditors (liability).
Endorsement over the counter of the bank
A cheque received from a debtor may be presented over the counter of debtor's bank and cash money is received against it. Suppose on 5.1.2005, we receive a cheque from our debtor K. Khan for Rs. 5,000 on Allied Bank Ltd. The Mall Lahore and we encash it over the counter of his bank. The following will be the entry:
5.1.2005
Cash A/c.........................................Dr. 5,000
K.Khan A/c.....................................5,000
(being cheque received and encashed)
Note:
There will be no entry in Bank A/c, since there has been no change in the bank balance.
Dishonour Of Cheque
Sometimes there may be a mistake in writing a cheque or the amount of deposit in bank A/c may be less then the amount of cheque drawn . In such a case the bank will refuse to honour the cheque and the cheque is called "dishonour cheque". The entries to be made in case of dishonour of cheque are given below:
Cheque received from debtors:
(a) If deposited into the bank and return dishonoured:
Suppose on 5.1.2005 we received a cheque from a debtor Mr. Sohail for Rs. 5,000 and is deposited into the bank for collection on the same date. But on 10.1.2015, the cheque is returned dishonoured by the bank and in turn we return it to Mr. Sohail. The following entries are passed in our books:
5.1.2005
Bank A/c.............................................Dr. 5,000
Mr. Sohail A/c...................................5,000
(being cheque receive and deposit into the bank)
10.1.2005
Mr. Sohail A/c...................................Dr.5,000
Bank A/c............................................5,000
(being cheque returned dishonoured)
Note:
The first entry shows that bank balance has increased and the account of the debtor has been settled (not remain debtor). The second entry shows that Mr. Sohail again has become debtor and the bank balance has reduced.
(b) If endorsed to a creditor and return dishonoured:
Suppose on 10.1.2005 we receive a cheque from amjad for Rs. 1,000 and on 12.1.2005, we endorse it to our creditor Mr. Naeem. But on 15.1.2005, the cheque is dishonoured and received back from Mr. Naeem and we return it to Amjad. The following will be the entries:
10.1.2005
Cash A/c..................................................Dr.1,000
Amjad A/c...................................................1,000
(being cheque received )
12.1.2005
Mr. Naeem................................................Dr. 1,000
Cash A/c.............................................................1,000
(being cheque endorsed)
15.1.2005
Amjad A/c................................................Dr. 1,000
Mr. Naeem A/c..............................................1,000
(being cheque returned dishonoured)
Note:
The last entry indicates that Amjad has become debtor and Mr. Naseem has become creditor again.
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