The following steps assume that both the original receipt of the money and the reversal (i.e. dishonoured cheque) are both shown in your actual bank account, and that neither have been reconciled or included in a VAT report yet.
Locate the original receipt in your Bank Transactions, and change the Type of payment from Invoice Receipt to General Receipt. This will remove the payment from the invoice, thereby leaving it as unpaid. Code the General Receipt against an account such as Dishonoured Customer Payments (or similar). If you do not have such an account, you can create one in the Chart of Accounts.
Create a Spend Money transaction (with a type of General Payment) to reflect the dishonoured cheque or payment. This is essentially a reversal of step 1. The date of this transaction should match the date when the bounced cheque was reflected on your bank statement. This transaction should be coded to the same account as the Receive Money transaction created in step 1 above.
The net effect of Step 1 and 2 is:
- a zero value in the bank account with regards to the cheque
- the Dishonoured Customer Payments account has a zero balance
- the original invoice is reset to outstanding and the customer balance reinstated
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