Why wouldnt you want to post a payment against an invoice di

Why wouldn\'t you want to post a payment against an invoice directly to a bank account?

Solution

Usually customers will issue cheques to discharge their liabilities. So the amount will be realised only when the cheques were deposited in bank and gets cleared. So the entries will be as follows:

Invoice Booking...................... Customer A/c 5,000

Revenue A/c 5,000

Cheque received..................... Undeposited funds 5,000

Customer A/c 5,000

Chques deposited and reliased Bank A/c 5,000

Undeposited Funds 5,000

So if the cheques were received, we will post it to undeposited funds instead of bank. When it gets realised we will transfer the balance to bank account.

Suppose if cheques were not realised then the accounting entries will be as follows:

Cheques were not realised...............Customer A/c 5,000

Undeposited Funds 5,000

Since cheques were not realised, we will reverse the notional asset of undeposited funds and wil debit the customer since his obligation tom pay is not yet completed.

So finally there is chance of cheques cancellation due to various reasons like insufficient funds, discrepencies in cheque and some other. In order to avoid those things, we will use a notional account undeposited funds instead of bank directly.

In the same way, we can apply the same rule to vendor payments also.