Are Outstanding Checks Added or Subtracted?

Bank reconciliation is a common financial practice for individuals and businesses, involving the comparison of personal financial records with bank statements. This process helps ensure the accuracy of all recorded transactions. A frequent point of discussion in this reconciliation process involves “outstanding checks,” which often cause confusion. Understanding how these checks are handled is important for accurate financial oversight.

Defining Outstanding Checks

An outstanding check refers to a payment that an account holder has written and recorded in their own financial records, but which has not yet been presented to or processed by their bank. This situation typically arises due to a timing difference between when the check is issued and when the recipient deposits it, or when the bank completes its clearing cycle. For example, a check mailed to a vendor may take a few days for postal delivery and then additional time for the vendor to deposit it. Most checks clear within two business days, but factors such as large amounts (e.g., over $5,500), new bank accounts, or specific bank policies can extend this to seven or even nine business days. Checks that remain outstanding for an extended period, often six months, may become “stale” and can be refused by the bank.

The Purpose of Bank Reconciliation

Performing a bank reconciliation serves several purposes for financial management. It allows individuals and businesses to verify the accuracy of their internal financial records and the bank’s statements. This cross-referencing helps identify any discrepancies or errors. The reconciliation process also acts as a safeguard against potential fraudulent activity by enabling the early detection of unauthorized transactions. Ultimately, the goal is to reconcile these two sets of records to arrive at a true, adjusted cash balance.

Adjusting for Outstanding Checks

When performing a bank reconciliation, outstanding checks are subtracted from the balance shown on the bank statement. This adjustment is necessary because the bank’s statement only reflects transactions it has already processed. Checks that are still outstanding have not yet been presented to the bank for payment, so the bank’s balance does not reflect these outgoing funds. By deducting the total of outstanding checks from the bank statement balance, the bank’s reported cash position is adjusted to account for these pending withdrawals. This brings the bank’s balance into alignment with the actual amount of cash available.

Performing a Simple Reconciliation

A bank reconciliation begins by comparing the ending balance on your bank statement with the cash balance recorded in your own checkbook or accounting software. On the bank statement side, adjustments often include adding “deposits in transit,” which are funds you have recorded as received but the bank has not yet processed. Conversely, outstanding checks are subtracted from the bank balance.

On the checkbook or book side, adjustments involve items the bank has processed but you have not yet recorded. Bank service charges, which can range from $5 to $25 per month or involve specific fees for services like stop payments (around $10 to $15), need to be subtracted from your balance. Similarly, any Non-Sufficient Funds (NSF) checks, which were deposited but later bounced, must also be subtracted. Conversely, interest earned on your account, which the bank credits automatically, should be added to your book balance. The ultimate goal is for the adjusted bank balance to precisely match the adjusted book balance.