Journal Entry for Dishonoured Cheque

When a cheque deposited in the bank is returned dishonoured, it means that the cheque issuer's bank has refused to honour the cheque due to insufficient funds or any other reason. As a result, the cheque amount is not credited to the account of the cheque holder. Here is the journal entry to be passed in this situation:

1. When the cheque is deposited in the bank:

Bank Account Debit - ₹500
To Cheque Receivable Account Credit - ₹500

2. When the cheque is dishonoured:

Cheque Receivable Account Debit - ₹500
To Bank Account Credit - ₹500

Explanation:

When the cheque is deposited in the bank, the bank account is debited, and the cheque receivable account is credited. This is because the bank account is the source of funds, and the cheque receivable account represents the amount of the cheque that is yet to be credited.

When the cheque is dishonoured, the cheque receivable account is debited, and the bank account is credited. This is because the cheque receivable account represents the amount of the cheque that is now not going to be credited, whereas the bank account is the account from where the funds were debited.

In this case, since the cheque amount is ₹500, both the debit and credit entries are of the same amount. The reason for the dishonour of the cheque should also be recorded in the narration of the journal entry.

It is essential to pass the journal entry for a dishonoured cheque as it affects the financial statements of the company. The cheque amount cannot be considered as revenue until it is credited to the account, and hence, it should be written off as an expense. The journal entry also helps in keeping track of the bounced cheques, which can be used as evidence in case of any legal issues.

Debtors A/C Dr. 500 To Bank A/C 500