How to Calculate Outstanding Checks in Bank Reconciliation

Bank reconciliation compares a company’s internal cash records with its bank statement. This process ensures financial accuracy and determines a business’s true cash position. Its objective is to identify and resolve discrepancies, leading to an accurate cash balance. Outstanding checks are a common and significant item requiring attention during this process.

Understanding Outstanding Checks

Outstanding checks are payments a company has written and recorded but have not yet cleared the bank. They create a temporary difference because the company immediately reduces its cash balance, while the bank’s records only reflect the reduction once the check is processed. This means the bank’s reported balance will appear higher than the company’s internal cash balance until the checks clear.

For example, if a business issues a check to a vendor, the business’s cash ledger immediately shows a decrease. However, the bank will not deduct this amount until the check is deposited and processed. Checks typically take about two business days to clear, though this can vary.

Preparing for Bank Reconciliation

Before beginning bank reconciliation, gather all necessary documents for a comprehensive comparison. You will need the company’s cash ledger or check register, which details all cash inflows and outflows. The most recent bank statement is also required, providing an external record of transactions. Additionally, the prior month’s bank reconciliation statement can help track old outstanding items or deposits in transit.

Identifying and Calculating Outstanding Checks

To identify and calculate outstanding checks, compare each check in your company’s cash ledger against those cleared on your bank statement. As you find a check on both records, mark it off. Any checks recorded in your ledger without a corresponding mark on the bank statement are outstanding.

After identifying all unmatched checks, list each outstanding check individually and sum their amounts. This total represents the amount by which your bank’s balance is overstated due to these uncleared payments.

Integrating Outstanding Checks into Your Reconciliation

Once the total amount of outstanding checks is calculated, subtract this figure from the ending balance reported on the bank statement. This adjustment brings the bank’s balance closer to the company’s true cash position. A comprehensive bank reconciliation also accounts for other common reconciling items:

• Deposits in transit, which are added to the bank balance.
• Bank service charges, which are subtracted from the book balance.
• Interest income earned on the bank account, which is added to the book balance.
• Bank errors or non-sufficient funds (NSF) checks, which require adjustments to either the bank or book balance.