Accounting for dishonored customer cheque

Steps:

• Record receipt of cheque on 2 April: Debit bank, credit Zafar (reduces receivable).
• On 12 April, cheque returned unpaid: Reinstate receivable by debiting Zafar, but adjust for doubtfulness.
• Recognize the debt as doubtful due to non-payment: Debit provision for doubtful debts to increase allowance.
• Credit bank to reverse the original deposit and reflect reduced cash balance.

Why D is correct:

• Under accrual accounting, a dishonored cheque increases doubtful debt risk, so debit provision for doubtful debts (expense/allowance adjustment) and credit bank per the matching principle for failed payment.

Why the others are wrong:

• A. Irrecoverable debts / bank: Applies to confirmed bad debts written off, not reversible bounced cheques.
• B. Irrecoverable debts / Zafar: Prematurely writes off the debt without evidence of irrecoverability.
• C. Provision for doubtful debts / Zafar: Incorrectly reduces the receivable balance instead of reinstating it.

Final answer: D