Stop payment definition
/What is a Stop Payment?
A stop payment is a request made to an entity's bank to not honor a check that the entity has issued to a payee. The notice may need to be in writing. The bank will then enter a block flag into its accounting system that will reject the check when it is presented for payment. The bank charges a fee for this service, which is deducted from the entity's checking account. If the bank then pays the check to a payee, the bank is liable to the payer for the amount of the check.
Example of a Stop Payment
John writes a $1,500 check to a contractor for home repairs. However, before the contractor cashes the check, John discovers that the work was incomplete and poorly done. To prevent the contractor from cashing the check, John contacts his bank and requests a stop payment order. This involves the following steps:
John contacts his bank and provides details (check number, payee name, amount, and date).
The bank processes the stop payment request, preventing the check from being honored.
The contractor attempts to deposit the check, but the bank rejects it due to the stop payment.
John avoids an unwanted payment and renegotiates the work with the contractor before issuing a new payment.
Reasons for a Stop Payment
There are several reasons why a stop payment may be issued. For example, the payables staff may have learned that they paid the wrong amount, or sent the original check to the wrong address, or learned after issuance that the check should not have been issued at all.
Accounting for a Stop Payment
A stop payment request is made when you do not want to honor a check, so this means that the check should be reversed in the accounting system. This will result in a debit to the cash (asset) account and a credit to the accounts payable (liability) account. If the intent is to also eliminate the underlying payable, then this will require a debit to the accounts payable (liability) account and a credit to the applicable expense account.