Top 5 Common Reasons Why Cheques Get Dishonored

Cheques are one of the widely used ways of monetary transactions. Individuals use them to withdraw money from banks and businesses to pay for the product or service. Despite its effectiveness, it can create significant problems when the cheque is bounced or dishonored. It makes it impossible to withdraw money and challenging to make a journal entry for cheque dishonoured in the accounting books. 

The accountant has to keep track of all the expenses and income, whether the transaction is completed or pending. It helps to maintain consistency in accounting data and avoid any inconsistencies. The best way to prevent a problem is to know more about it. Therefore, here are five common reasons why cheques banks refuse to honour a cheque, so you can take the necessary steps to avoid it from happening.

Top 5 Common Reasons Why Cheques Get Dishonored

1.  Insufficient funds

Insufficient funds are one of the major reasons behind dishonored cheques. When the amount mentioned on the cheque is higher than the drawer's bank balance, the cheques get dishonored. The drawer should reassure that there are sufficient funds in their account to avoid getting bounced cheques due to insufficient balance. You can also ask when to cash the cheque to arrange the money before that date. When the cheque gets dishonored, it creates ambiguity in the accounting. If an individual pays their vendor through a cheque, a Journal Entry debits the vendor and credits the bank. The entity pays its vendor through a Cheque, and the Journal Entry (JE) will debit the vendor and credit the bank. When the same cheque gets dishonored because of insufficient funds, a journal entry for cheque dishonored has to be made. It increases the liability and the bank balance. 

2.  Non-matching signature

Irregular signatures are a common reason behind a cheque getting dishonored. If the drawer's signature on the cheque presented at the bank is different from the original signature specimen, the bank will dishonor the check.  

3.  Drawer's death

If the issuer of the cheque dies for some reason, the bank dishonors a cheque when it receives the information about the drawer's death. Until all the clearance issues are not resolved, the bank will not process the cheque.

4.  A stale cheque

The cheque has to be processed within six months it was issued. That means if you try to cash a cheque with an issuance date after six months, it will be dishonored by the bank. Such cheques are called stale cheques.  

5.  Closed Account

Post-dated cheques are a helpful way to make payment after having sufficient money in the bank account. It reduces the chances of a bounced cheque. Unfortunately, if the bank account is closed before the issued date mentioned on the post-dated cheque, the bank will dishonor the cheque.  

Cheque dishonoring is a criminal offense, and the party at fault can face severe fines and jail time. The drawer is given a chance to pay the amount immediately if the payee decides to take legal action against the drawer. You can avoid all that by ensuring you have a sufficient balance in your account before using cheques for payment.