## **Learning Outcomes**

After completing this article, you will be able to explain how to identify, record, and adjust for returned items and dishonoured cheques in the financial records. You will be able to reconcile bank transactions, post correcting entries for non-clearing items, and understand impacts on both statement of profit or loss and statement of financial position—key knowledge for ACCA FA2 exam questions.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand how bank transactions are recorded and how discrepancies and timing differences, including dishonoured cheques and returned items, are accounted for in the general ledger.

- Record cash and bank transactions in the general ledger
- Identify and account for returned items and dishonoured cheques
- Perform bank reconciliations and explain common timing differences
- Recognise errors, omissions, or non-clearing items and process adjustments as needed
- Report corrected cash and bank balances in the financial statements

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. When a cheque received from a customer is dishonoured, which two accounts in the double-entry system are affected?
2. If a payment from a customer bounces after being previously recorded as a cash receipt, what adjustment must be made to the trade receivables account?
3. True or false? Unpresented cheques are an example of a timing difference in a bank reconciliation.
4. What is the effect on the cash at bank balance if a previously deposited cheque is later returned unpaid?

## **Introduction**

Bank transactions are recorded daily, but not all items clear the bank immediately or as expected. One common issue is the handling of returned items and dishonoured cheques. These events arise when a cheque received is rejected by the customer's bank, often due to insufficient funds. This can impact both the cash at bank balance and trade receivables, creating discrepancies between the accounting records and the bank statement.

Managing these scenarios accurately is essential for producing correct financial statements and for passing the ACCA FA2 exam, which frequently tests knowledge of timing differences and necessary ledger adjustments.

> **Key Term: dishonoured cheque**
> A cheque that is not paid by the drawer’s bank and is returned to the payee, usually because of insufficient funds or another payment issue.
>
> **Key Term: returned item**
> Any payment, typically a cheque, returned by the bank unpaid or not cleared, requiring reversal of the original accounting entry.

## **Returned Items and Dishonoured Cheques: Principles and Recording**

### Identifying Returned and Dishonoured Cheques

When a business receives a cheque, it records the receipt in both the cash at bank account and as a reduction to trade receivables (if settling a credit sale). If the bank subsequently returns the cheque unpaid, the business must reverse the original receipt.

Returned items are usually identified when reconciling the bank statement to the business’s cash at bank account. The bank statement will show an outflow or a reversal for the returned cheque, reducing the available balance.

### Accounting Entries for Dishonoured Cheques

If a cheque previously credited to the bank account is dishonoured, the following double-entry is necessary:

- Debit: Trade receivables (to reinstate the amount owed)
- Credit: Cash at bank (to remove the non-received funds)

This ensures the accounting system reflects that the cash has not truly been received and the customer remains in debt to the business.

> **Key Term: trade receivables**
> Customers who owe money to an entity as a result of sales made on credit.

## **Impact on Bank Reconciliation and the Financial Statements**

Timing differences are common in bank transactions. Items such as unpresented cheques (issued but not yet cleared) and outstanding lodgements (receipts recorded but not yet credited by the bank) create temporary mismatches.

Returned items and dishonoured cheques require actual correction of the business’s accounting records. Failure to adjust these results in incorrect cash at bank balances and misleading receivable figures. The statement of financial position must show only amounts truly held, and profit or loss must reflect realisable income.

### **Worked Example 1.1**

A customer pays a \$600 invoice by cheque. The entity records:

- Debit: Cash at bank \$600
- Credit: Receivables \$600

The cheque later bounces due to insufficient funds. What entries are required?

> **Answer:**
> The business must reverse the receipt:
>
> - Debit: Receivables \$600 (to show the customer still owes the amount)
> - Credit: Cash at bank \$600 (to remove the funds never actually received)

### **Worked Example 1.2**

During the bank reconciliation, you notice a \$250 cheque receipt from a customer listed in your accounts is not included on the bank statement. It is later confirmed as returned unpaid by the customer’s bank. What adjustment is required?

> **Answer:**
> Reverse the original posting:
>
> - Debit: Receivables \$250
> - Credit: Cash at bank \$250

## **Common Reasons Cheques Are Returned**

- Insufficient funds in the customer’s bank account
- Payment stopped by the customer
- Technical issues (incorrect date, mismatched signatures, damaged cheque)
- Account closed or frozen

Any of these reasons will result in the payment being reversed and the original debt reinstated.

## **Practical Steps: Adjusting for Dishonoured Cheques**

1. Check the bank statement regularly and identify any returned or dishonoured items.
2. Reconcile the cash at bank account with the bank statement, noting all discrepancies.
3. Reverse the original entry for the dishonoured item using the correct double-entry.
4. Contact the customer to arrange new payment if required.
5. If subsequent attempts to collect payment fail, consider treating as an irrecoverable debt (bad debt) following established procedures.

### **Exam Warning**

Be careful to distinguish between a timing difference (e.g. a deposit not yet cleared) and a dishonoured cheque (which requires a reversing entry). Only dishonoured items require adjustments to the ledger accounts.

### **Revision Tip**

Always check that both the cash at bank and trade receivables accounts are updated for any dishonoured cheque. Failing to reverse both sides is a frequent source of exam errors.

## **Summary**

Returned items and dishonoured cheques must be identified and reversed promptly in the accounting records. This restores the receivable and adjusts the bank balance, ensuring all amounts in the financial statements are correct. Regular bank reconciliations are essential to detect these issues early and maintain accurate accounts.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Recognise a dishonoured cheque and the need for reversal in the accounts
- Make the correct double-entry: debit receivables, credit cash at bank
- Understand the impact of returned items on the bank reconciliation and financial statements
- Ensure regular reconciliation to identify and correct returned items
- Know that failure to correct dishonoured cheques results in misstated cash and receivables

## **Key Terms and Concepts**

- dishonoured cheque
- returned item
- trade receivables

Bank transactions and timing - Returned items and dishonoured cheques