Key Takeaways
- Check issued but not yet cleared by bank.
- Creates timing difference in bank reconciliation.
- Must keep funds available until check is cashed.
- Outstanding checks pose fraud and overdraft risks.
What is Outstanding Check?
An outstanding check is a check that has been written and recorded by the issuer but has not yet been cashed, deposited, or cleared by the bank. This creates a timing difference between your accounting records and the bank statement, making it an important obligation to monitor.
Outstanding checks remain liabilities until they are processed by the bank, impacting both your cash flow and reconciliation process.
Key Characteristics
Outstanding checks have specific attributes that affect your financial management:
- Timing difference: They cause discrepancies between your ledger and bank balances until cleared.
- Liability recognition: They represent an accounting liability for the issuer until funds are withdrawn.
- Potential for becoming stale: Checks typically become void after six months if uncashed.
- Risk of loss or fraud: The longer a check remains outstanding, the higher the chance of theft or alteration.
- Earmarking funds: The issuer must maintain sufficient funds to cover the earmarked amount.
How It Works
When you write a check, you immediately record it in your accounting system as a pending payment, but the bank balance remains unchanged until the payee deposits or cashes the check. This lag can affect your available funds and requires careful tracking.
During bank reconciliation, you subtract the total outstanding checks from your bank's ending balance to align your records with the bank statement. This process ensures your financial statements accurately reflect your cash position.
Examples and Use Cases
Outstanding checks occur frequently in various business contexts:
- Airlines: Companies like Delta may issue numerous checks to vendors and employees, which can remain outstanding depending on processing times.
- Payroll: Businesses often have outstanding payroll checks until employees deposit or cash them.
- Vendor payments: Outstanding checks to suppliers can impact cash flow management and require regular reconciliation.
- Investment accounts: When using online platforms, such as those reviewed in our best online brokers guide, tracking outstanding checks helps maintain accurate account balances.
Important Considerations
Managing outstanding checks effectively reduces the risk of overdrafts and accounting errors. Always maintain accurate records and perform frequent bank reconciliations to avoid overspending funds that have been earmarked for payment.
Additionally, uncashed checks can become stale and require follow-up with payees to prevent complications. Leveraging accounting tools and understanding the reconciliation process can help ensure your financial data remains accurate and up-to-date.
Final Words
Outstanding checks create timing gaps that can affect your available balance and financial reporting. Regularly reconciling your bank statements and tracking these checks helps prevent overdrafts and ensures accurate cash management. Make it a habit to review outstanding checks whenever you perform your bank reconciliation.
Frequently Asked Questions
An outstanding check is a check that has been written and recorded by the issuer but has not yet been cashed, deposited, or cleared by the bank. It creates a timing difference between the issuer's accounting records and the bank statement.
During bank reconciliation, the total amount of outstanding checks must be subtracted from the bank's ending balance to arrive at an adjusted balance that matches your internal records. This adjustment is necessary because the bank statement doesn’t yet reflect these pending payments.
Tracking outstanding checks helps ensure you maintain sufficient funds to cover them and avoid overdraft fees or bounced checks. It also reduces risks of fraud, loss, or unauthorized alterations by monitoring checks that have not yet cleared.
Checks that remain outstanding for several months are called stale checks and typically become void after six months. In the U.S., such unclaimed checks may be considered unclaimed property and must be turned over to the state.
Yes, if you forget about outstanding checks and spend the earmarked funds elsewhere, your account balance may drop below zero when those checks are cashed, leading to overdraft fees or the bank refusing to honor the checks.
Maintain accurate records, perform regular bank reconciliations, and follow up with payees who delay depositing checks. Using accounting software can simplify tracking and help keep your financial records audit-ready.
In accounting, an outstanding check is a liability for the issuer since funds are earmarked for payment. It represents a credit in the issuer’s records and a debit in the recipient’s records once the check is cashed or deposited.
