There is a concept called as stale cheque. A cheque is invalid or stale if it is not presented to the banker within 6 months. If this is the case the drawer of the cheque will reverse his bank payment entry.
Now here is the problem. Mr.A pays a cheque to Mr B. Mr.B deposits it in his bank and get the funds transferred. The catch is that the banker has transferred funds from some other parties account into Mr.B's account but Mr.A does not know tat and neither does the banker that he had made a mistake.
So when Mr.A prepares his BRS he reverses the cheque paid to Mr.B since it has not appeared in the bank statement.
My doubt is that Mr A has discharged his liability already he just does not know that he has already done it. So should he reverse the payment made to Mr.B? or show as though payment is made?. The reason i am asking this question is that BRS can identify the differences. It cannot identify the cause for the differences.
So in this event what should be the accounting treatment? and what control measure can i use if such a fiasco takes place? and for preventing such an event?
When we prepares monthly BRS and found such type of stale cheques we do not reverse the accounting entry at once. First we have to talk with other party for reason of exipired cheque. Get the cheque back and then pass the reverse entry.
Please ensure to pic the stale cheque from other party before making a reverse entry.
Rangarajan
(CA Student)
(200 Points)
Replied 31 August 2008
Hello Shravan
Your question is interesting. But u must realize these things would have been thought earlier and counter measures would have been mentioned.
As in your case, Mr. A gives a cheque to Mr. B for Rs 10000, discharging his liability. Mr. B presents it to the Banker. The Banker by accident transfers the funds from a third person say Mr. C.
Now, when Mr. A gives the cheque, he would have passed a payment entry in his books. When Mr. B receives the funds, he would have already passed a receipt entry form Mr. A (which is wrong).
After 6 months, Mr. A will realize that the cheque issued to Mr. B was not debited to his account and hence pass a reversal for the same, assuming that it had not been presented for payment.
Now here’s the difference from that of your argument to mine.
Mr. A is still liable to Pay Mr. B a sum of Rs 10000. Mr. B had received Rs 10000 in his bank account, which is equivalent to that of the cheque given by Mr. A. It is quite normal, that Mr. B assumes that it is the receipt for the cheque give by Mr. A. But that doesn’t mean Mr. A has paid it. It is not Mr. A’s Money. It is just a transfer of money by accident done by Banker. The Banker is responsible for such a mistake. And moreover, Mr. B accounting it has receipt from Mr. A is also wrong.
The persons involved in this mistake are the Banker, Mr. C (for debiting him) and Mr. B (for crediting him). Mr. A is by no means related to this mistake.
Let us take a closer look at accounts,
In the Books of Mr. A, Mr. B’s account will show a credit balance of Rs 10000 (after passing reversal and assuming there is no other transaction between them)
In the Books of Mr. B, Mr. A’s account will be closed (assuming there is no other transaction between them)
Internal Control or detecting these errors
Mr. A will be least bothered to know why cheque issued to Mr. B has not been debited and it is quite natural that Mr. A assumes that Mr. B has not presented it. In the same way Mr. B will not be bothered to check the source of receipt since the amount is equivalent to Mr. A’s cheque.
But Mr. C while preparing his BRS will come to know that there is a debit of Rs 10000 for which he has not accounted. As he will probe into the entry, he shall come to know that, he has not issued any such a cheque. Hence, he will notify the Banker for such a debit. In the worst case, Mr. C will sue the Banker for such an irresponsible mistake.
Now in the view of Mr. A and Mr. B
Practically if you see, there is a concept called Parties Balance Reconciliation
I will explain that in your case itself
Mr. B being the creditor sends to Mr. A, the debtor, an account statement showing the transactions between them.
Normally Mr. B will send the account of Mr. A as in Mr. B’s books. Mr. A will reconcile this account with that of Mr. B’s account as in Mr. A’s books. By doing this, the differences in the transactions will be noted down. After clarifying and coming to a conclusion about the difference, the cheque will be issued for the balance by Mr. A.
In this case, the difference will also include a cheque reversal made by Mr. A in his books, which is not appearing in Mr. B’s books. This question will be raised by Mr. A to Mr. B. Then Mr. B will check the source of the transaction and might notify the Banker.
Mr. Rajesh who has answered, mentioned it very correctly regarding collection of stale cheque from the other party.
Hope Your question is answered
Regards
Rangarajan.K
(Guest)
It should continue to be shown as payment in Account Books & the item can be shown in the BRS. If we dont know the exact reason at the date of makinh BRS, we can explain the item in BRS as Cheque issued but not yet presented to Bank for pyt. Howver if v know that party has received the pyt, v can write in BRS as pyt not debited by bank at least for 1 A/c year so as to serve as reminder for future.
AZAD BHALLA
(SERVICE)
(71 Points)
Replied 23 September 2008
Agreed with Mr. Rajesh & Mr. Rangrajan and like to suggest u that you create a Creditors A/c with name "Stale Cheques A/c" and transfer the entry from Bank A/c to that A/c as after six months bank may finds it mistake and can debit that amount to your a/c that time u can use the "Stale Cheque A/c" for the same entry. In this way your a/c will be tallied with Mr. B and ur BRS will also tally. After a suitable time u can write off the stale cheque a/c balance showing account written off income in the profit & loss a/c.
Azad Bhalla
BALU MATURI
(ARTICLE ASSISTANT)
(21 Points)
Replied 20 June 2012
CAclubindia
