Understanding Outstanding Checks: What They Are, How They Work, and Their Risks and Implications

For individuals, the risk lies in overspending and the potential for overdraft fees should the outstanding check be presented for payment unexpectedly. If you write a check and the money never leaves your account, you may develop the false belief you can spend those funds, but the money still belongs to the payee. If the payee finally deposits the check after months of delay, you risk overdrawing your account and bouncing the check. Instead, electronic cash payment methods, such as Zelle®, Accounts Payable Management take the money out of your account faster. When the check is cashed or deposited, it is no longer considered outstanding, and the payor can reconcile the payment with the pending transaction. In U.S. accounting textbooks, every check that has not been cleared is termed an outstanding check.

Accounting for an Outstanding Check

Provided you maintain vigilance and embrace technology, you can handle outstanding checks with ease. Maneuvering through the financial labyrinth of checks, especially outstanding checks, demands awareness and action. Delayed action can result in the check becoming stale dated, ledger account usually after six months, depending upon the bank.

• Furthermore, they can create inconsistencies that complicate a person’s accounting records.
• If they do this in a timely manner, the check clears, and the payment gets transferred from the payor’s bank account to the payee’s bank account.
• However, it is ultimately up to the receiving bank whether they will cash (or deposit) a check or not.
• If that money is spent on something else, you may not have enough money in the bank account to cover all your promises to pay.

How Do I Reconcile Outstanding Checks with My Bank Statement?

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What can happen if an outstanding check is not cleared?

This communication can help uncover any issues, such as an incorrect address or a lost check. To accurately reflect your what is an outstanding check financial position, you need to reconcile your accounts. This involves comparing your check register with your bank statement. Outstanding checks are subtracted from your bank statement balance to get an adjusted balance, which should match your check register balance. I’m reconciling a cash account for a company who hasn’t done any recs in the past 4 months due to turnover.

• Remember, the goal is to have a clear understanding of your actual available balance to make informed financial decisions.
• If the payee decides to cash the check later, this can help avoid any unnecessary NSFs.
• The payment goes on the general ledger, but businesses must make adjustments during reconciliation, and they may need to reissue stale checks.
• While this prevents the check from bouncing, the bank will levy a separate overdraft fee, which is usually $25 to $35.
• When the check reaches this expiration date, it is no longer valid, and the bank the check was written from may not honor the payment.
• I like to do the bank side first because it is generally easier than the book side.

First, know that outstanding checks expire, often after six months, but sometimes as quickly as 30 or 60 days. Knowing how to stop payment on a check is useful as well if you wish to void an outstanding check (more on this below). Proper management of outstanding checks involves tracking, reconciliation, timely communication, and ensuring sufficient funds are available to honor the checks when presented for payment. Outstanding checks also provide the opportunity for payment delays, which can be advantageous when it comes to managing cash flow. Even if the checkwriter has sufficient funds, any delay from the depositor simply means higher interest revenue on the capital balance waiting to be drawn down.

Stop Payments and Reissuance

It might be because it’s “unprocessed in the bank system.” Imagine a bustling post office where every piece of mail has its own journey. Sometimes, a letter gets stuck or delayed—much like an outstanding check. Understanding the consequences of having outstanding checks can be significant for businesses in various ways. This register ensures the outstanding amount is subtracted from the bank’s reported balance. Relying solely on the bank’s current balance risks spending funds already committed to the outstanding payment.

• The other state is that the check has not yet reached the recipient and is still in the payor’s bank-clearing cycle.
• With Electronic Payments implemented, processing times are expedited and payment accuracy increased.
• If the payment is still due, the original outstanding check is voided in the ledger, and the corresponding amount is added back to the book balance.
• However, by the end of the month, the landlord still needs to deposit the check.
• Outstanding checks also provide the opportunity for payment delays, which can be advantageous when it comes to managing cash flow.
• In this scenario, the check is considered outstanding as the funds have been deducted from your account but have not been received by your friend.

Best Budgeting Apps for Money Management

• In that case, the payor must immediately inform its bank to stop the payment of a check.
• Sometimes, it is simply a matter of bad timing that leads to a check being labeled as outstanding.
• Repeated instances of insufficient funds activity can lead to more severe consequences beyond monetary fees.
• There are actually some benefits to have checks outstanding as well, though.
• When compared to paper transactions, online banking is a considerably more efficient accounting system.
• This commonly occurs when checks are written in the last few days of the month.

Most banks offer various types of overdraft protection, such as linking a savings or a credit card to your checking account. Be sure to check the terms and conditions of these arrangements carefully. Because businesses are required to follow unclaimed property rules, any checks that have been outstanding for an extended period of time must be repaid to the state as unclaimed property. To cancel the check, company needs to debit cash at bank and credit accounts payable as they delay the payment.