Dishonour

Definition

“Dishonour” in accounting refers to failing to fulfill a financial commitment. It can occur under several circumstances:

Cheque Dishonour: When a bank fails to pay a cheque because the drawer’s account does not have sufficient funds. The bank typically marks the cheque with “refer to drawer” and returns it to the payee through their bank.
Dishonour by Non-Acceptance: When a party refuses to accept a bill of exchange, indicating that they do not agree to the terms presented.
Dishonour by Non-Payment: When a party fails to pay a bill of exchange upon its maturity.
General Financial Dishonour: The failure to honour any other financial obligation.

Examples

Example 1: A customer’s cheque is returned by the bank marked “refer to drawer” due to insufficient funds in their account.
Example 2: A company refusing to accept a bill of exchange presented by a supplier.
Example 3: A business fails to pay an accepted bill of exchange upon its due date.

Frequently Asked Questions (FAQs)

What happens when a cheque is dishonoured?

When a cheque is dishonoured, the bank returns the cheque unpaid to the payee, usually marking it with a reason such as “refer to drawer,” which implies insufficient funds. The payee may choose to resubmit the cheque or take legal action to recover the funds.

Can a dishonoured cheque be re-deposited?

Yes, a dishonoured cheque can often be re-deposited if the payer assures that sufficient funds will be available in the account. However, repeated dishonouring can affect the payer’s creditworthiness.

What is the consequence of dishonour by non-acceptance?

Dishonour by non-acceptance can lead to legal actions by the party presenting the bill, as it signifies the drawee’s denial of responsibility for payment, thereby voiding the contract outlined in the bill of exchange.

Who suffers the most from a dishonoured cheque?

The primary burden falls on the payee, who expected payment. They may face cash flow problems and could incur fees related to the dishonoured cheque.

What steps can be taken to avoid cheque dishonour?

Ensure the account holds sufficient funds before issuing a cheque. Checking accounts regularly and using overdraft protection can also help.

Cheque: A written order directing a bank to pay a specific amount from one person’s account to another.
Bill of Exchange: A written, unconditional order by one party to another to pay a certain sum either on-demand or at a future date.
Financial Obligation: Any outstanding debt or regular payment liability one party owes to another.
Drawer: The person who writes a cheque or bill of exchange.
Payee: The person to whom a cheque or bill of exchange is payable.

Online References

Investopedia: Dishonoured Cheque
Accounting Tools: Dishonour
HMRC: Understanding Bills of Exchange

Suggested Books for Further Studies

Intermediate Financial Accounting: Volume 1 by Michael Spiceland, James Sepe, and Mark Nelson.
Financial Accounting Theory and Analysis by Richard G. Schroeder, Myrtle W. Clark, and Jack M. Cathey.
Principles of Accounting by Belverd E. Needles, Marian Powers, and Susan V. Crosson.
Accounting: Tools for Business Decision Making by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso.

Accounting Basics: “Dishonour” Fundamentals Quiz

### What typically marks a cheque as dishonoured by a bank due to insufficient funds? - [ ] Deposit not recorded - [x] Refer to drawer - [ ] Cheque out of date - [ ] Overdrawn account > **Explanation:** A cheque is typically marked "refer to drawer" by the bank when there are insufficient funds in the drawer's account. ### What does dishonour by non-acceptance indicate? - [x] Denial of the bill of exchange terms - [ ] Payment processed late - [ ] Cheque bounced back - [ ] Issue a new bill > **Explanation:** Dishonour by non-acceptance indicates refusal to agree to the terms of the bill of exchange by the intended payee. ### What action is commonly taken by the payee after a cheque is dishonoured? - [x] Re-deposit the cheque - [ ] Report to police - [ ] Destroy the cheque - [ ] Ignore the dishonour > **Explanation:** The payee may often resubmit the cheque after contacting the drawer to ensure sufficient funds are available. ### Which scenario is NOT an example of a dishonoured financial obligation? - [ ] A returned cheque due to insufficient funds - [x] An accepted loan agreement - [ ] A bill of exchange that is unpaid at maturity - [ ] Non-acceptance of a contractual payment > **Explanation:** An accepted loan agreement does not constitute dishonour; it must be unpaid or denied obligations to be classified as such. ### What term is used for the party writing a cheque? - [x] Drawer - [ ] Payee - [ ] Drawee - [ ] Endorser > **Explanation:** The term "drawer" is used to identify the person who writes a cheque. ### What impact does a repeatedly dishonoured cheque have on creditworthiness? - [ ] No impact - [ ] Positive impact - [x] Negative impact - [ ] Neutral impact > **Explanation:** Repeated dishonouring of cheques negatively affects the payer's creditworthiness. ### Legal actions may follow which type of dishonour action? - [ ] Overpayment of an invoice - [x] Dishonour by non-acceptance - [ ] Excess funds in the account - [ ] Acceptance without payment > **Explanation:** Dishonour by non-acceptance can lead to legal actions as it voids the terms of the bill of exchange. ### How can businesses avoid cheque dishonour? - [ ] Ignore cheque repayments - [ ] Pay invoices late - [x] Ensure sufficient funds - [ ] Confuse account signatures > **Explanation:** Businesses should ensure their accounts contain sufficient funds before issuing cheques to prevent dishonour. ### What does a bill of exchange represent? - [ ] Rejected cheque - [x] Written unconditional order of payment - [ ] Overdraft agreement - [ ] Endorsed cheque > **Explanation:** A bill of exchange represents a written, unconditional order by one party to another to pay a specified sum either on-demand or at a future date. ### Dishonour by which action involves rejecting a contract outlined in a bill of exchange? - [ ] By mutual agreement - [x] By non-acceptance - [ ] By prepayment - [ ] By overdraw > **Explanation:** Dishonour by non-acceptance means rejecting the terms outlined in a bill of exchange.

Thank you for exploring the concept of dishonour in accounting and testing your knowledge through our structured quiz!