UNPRESENTED CHEQUES IN CASH BASED ACCOUNTING

[MAMONA]

Hello everyone! We are following cash based accounting as per IPSAS. Recently our auditor has raised a query that unpresented cheques shall not be considered as expense and there should be no unpresented cheques at the end of the month. I do not agree with this because once we have handed over the cheque to the suppliers our liability is fulfilled. Can you please guide me in this regard. Also please guide me if there is any such requirement in IPSAS?

 

[Praz Finpoint]

No - once you issue the cheque to the supplier your liability settlement is not fulfilled, because no cash has actually even been paid to the supplier. The cheque could bounce for example due to errors in the cheque or inadequate balance in the bank account, which is not the responsibility of the supplier and as long as the supplier has not received the funds, but merely a cheque that has not yet been cashed, the liability is not settled. So in other words unpresented cheque is not a cash transaction.

 

[MAMONA]

But cash pertaining to unpresented cheques is not our cash that’s the cash of supplier who has the cheque thats why we cannot show it in our bank/cash balance and therefore its our expense. Because by giving cheque we have given the supplier the right or ownership of that cash in the bank, and cheque is just a substitute of physical cash . So whether we pay by cheque or cash the payment is considered to be done.
Otherwise we will be calling the bank everyday to know which cheques have been presented and then for those cheques we will have to post payment entry.

 

[Praz Finpoint]

Never heard the concept that cheque is equivalent to physical cash. As I explained above, the cheque is only valid if it can encashed by the Vendor - if the cheque bounces or there is insufficient cash in the bank balance of the Company - the value of the cheque is equal to the value of a plain piece of paper and it is not the responsibility of the Vendor that the cheque is supported by cash. As long as the vendor does not receive cash, the liability is not settled.

No companies do not call the bank everyday to check on the clearance of every single cheque - they do a month-end bank reconciliation to identify uncleared cheques and investigate the reasons why these cheques remained uncleared.

 

[StanleyR1]

Am I missing something here? It looks like you want to present your cash on an accrual basis.

Your assertion that the vendor owns cash in your bank account because you wrote them a cheque is wrong. Yes, they are entitled to it because you owe it to them but the act of writing the cheque doesn't grant them that or any title to your account.

 

[Kat Maple]

Hi Mamona

Interesting discussion. So I thought I would read the IPSAS Final Pronouncement 2017 "Financial Reporting Under the Cash Basis of Accounting." That statement makes a defining line at the point when an organization has or does not have control of cash - so not having control means it is no longer your cash. Given that, if you write a check and mail it you no longer have control over it. It is now a recordable payment of cash.
On the cash receipt side, this is even clearer. The statement says 1.2.7 "Amounts deposited in the bank account of an entity are controlled by that entity." And they said "amounts" not "pure cash" so a check would qualify. And consider, if the auditor applied the "a check is not cash" rule to deposits, then you would have a nightmare and have to see when each check given to you for deposit actually cleared before you could record it.
So, I say resist this auditor and save your sanity!

Regards

Kat

 

[Kat Maple]

Hi Mamona

One more thing:

The Pronouncement states that "Cash comprises cash on hand, demand deposits, and cash equivalents." And further defines "cash equivalents" as "short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value." The point - your check payments of course easily fall within that broad scope.

Regards

Kat

 

[MAMONA]

Hi Mamona

Interesting discussion. So I thought I would read the IPSAS Final Pronouncement 2017 "Financial Reporting Under the Cash Basis of Accounting." That statement makes a defining line at the point when an organization has or does not have control of cash - so not having control means it is no longer your cash. Given that, if you write a check and mail it you no longer have control over it. It is now a recordable payment of cash.
On the cash receipt side, this is even clearer. The statement says 1.2.7 "Amounts deposited in the bank account of an entity are controlled by that entity." And they said "amounts" not "pure cash" so a check would qualify. And consider, if the auditor applied the "a check is not cash" rule to deposits, then you would have a nightmare and have to see when each check given to you for deposit actually cleared before you could record it.
So, I say resist this auditor and save your sanity!

Regards

Kat

Hi Mamona

Interesting discussion. So I thought I would read the IPSAS Final Pronouncement 2017 "Financial Reporting Under the Cash Basis of Accounting." That statement makes a defining line at the point when an organization has or does not have control of cash - so not having control means it is no longer your cash. Given that, if you write a check and mail it you no longer have control over it. It is now a recordable payment of cash.
On the cash receipt side, this is even clearer. The statement says 1.2.7 "Amounts deposited in the bank account of an entity are controlled by that entity." And they said "amounts" not "pure cash" so a check would qualify. And consider, if the auditor applied the "a check is not cash" rule to deposits, then you would have a nightmare and have to see when each check given to you for deposit actually cleared before you could record it.
So, I say resist this auditor and save your sanity!

Regards

Kat

Thanks a lot, I was literally going insane.