Obsolete because now paper checks are processed by the electronic “check truncation” system (which also largely did away with check kiting). But back when checks took some days to officially clear was it the practice for retail businesses to classify checks as immediate income, or treat them as accounts receivable?
Most would classify it as income, with a separate item, “bad debt expense” being created for those which bounced.
Correct, it would be posted to the GL assuming that it is going to clear, and an adjustment made later if it did not.
Just verified this with m’lady, who does this (accounting) for a living. She notes that this assumes you are using accrual accounting. Cash accounting, it’s income only when it clears.
This literally may be the first time I answered a FQ…
Bad Debt Expense is still in use today, you use it to write off receivables that you never expect to see (for example an invoice that’s a year past due).
If a check bounced, I would assume cash would be credited while accounts receivable is debited, because you still expect the debt to be paid. You’d inform the client that the check bounced and expect them to rectify their mistake, at which point you could debit cash and credit AR again.
Only once the client made it clear that they would not honor the debt would you write off the invoice as bad debt expense, and this would be true whether they wrote a bad check or simply never paid their bill.
Eta: I guess I am thinking more of the situation where a company invoices customers for large amounts, rather than something like people paying for groceries with checks. That was pretty much extinct by my time.
What would the grocery store do if your check bounced?
Pretty much like you said, credit cash and debit A/R, then attempt to track you down and get payment.
Most businesses will also attempt to add an insufficient funds (NSF) fee (which is on top of the bank NSF fee), so there will be additional postings for that. That typically wouldn’t be posted to income.
Really? I would think it would be a major headache to try to track when each cheque cleared, unless you were a business with a small number of very large cheques - in which case that would be material. I would have guessed account for the day’s cheques received same cash from the register as income (cash sales, or in some businesses, against A/R from bills sent out), then attribute bounced cheques to “bad Cheques” as you are notified about them - hopefully not too many.
When I used to do the books in my Dad’s store, pre-computers, cheques were counted as cash at the end of the day, deposited with the bank with no distinction between cheque and cash, and recorded as such in the journal. I don’t think we were using accrual accounting.
Right, that’s why they’re posted as if they cleared immediately. You only deal with the exceptions.
You still are tracking when they clear through bank reconciliation - comparing the deposits and withdrawals in the bank statement to your GL - so you will catch ones that don’t clear. But reconciliation is easily automated to clear all the matches, so it isn’t onerous.