What Do Outstanding Checks Issued to Vendors Mean?
Understand what outstanding checks issued to vendors signify for your financial records and bank reconciliation, and how to manage them effectively.
An outstanding check is a payment issued by a business that has yet to be processed by the recipient’s bank. These checks create a temporary difference between a company’s internal cash records and its bank statement balance. Understanding and handling such checks is fundamental for accurate financial oversight.
What an Outstanding Check Is
An outstanding check is a payment that a company has issued and recorded, but which has not yet cleared by the company’s bank. From the perspective of the issuing company, the funds for this payment have been allocated, meaning the company’s internal cash balance has been reduced. However, the bank’s records do not yet reflect this reduction because the check has not completed the clearing process.
This situation frequently arises when checks are issued to vendors. The amount of the check is considered spent by the company, but the money remains in the bank account. This creates a timing difference, where the company’s books show a lower cash balance than what is reported on the bank statement. Such a discrepancy is a normal part of the payment cycle and requires careful attention.
Why Checks Remain Outstanding
Checks remain outstanding for various reasons, primarily due to the time lag in the payment and banking systems. After a company issues a check to a vendor, the check must travel through the mail, which introduces an initial delay. Once received, the vendor requires time to process the check before depositing it into their bank account. Some vendors might hold onto checks for a period, perhaps waiting to accumulate several payments before making a deposit.
Additionally, a check could become outstanding if it is lost or misplaced by the vendor before it can be deposited. This can occur during transit or within the vendor’s own operations. While less common with electronic payment methods, these timing and logistical factors ensure that outstanding checks are a persistent feature of traditional check transactions.
Importance for Bank Reconciliation
Outstanding checks are a fundamental component of the bank reconciliation process, which aims to align a company’s cash balance with the balance reported by its bank. The purpose of bank reconciliation is to identify and explain any differences between these two records, ensuring that the company’s cash position is accurately reflected. Outstanding checks directly contribute to these differences because the company has recorded the payment, but the bank has not yet deducted the funds.
During reconciliation, outstanding checks are subtracted from the bank statement’s ending balance. This adjustment brings the bank’s reported cash balance into agreement with the company’s internal records, reflecting the funds that have been committed but not yet withdrawn. Failing to account for these checks would lead to an overstated cash balance on the bank statement, giving a misleading impression of available funds. Proper reconciliation ensures that financial statements accurately portray the company’s liquid assets, preventing overdrafts or misinformed decisions.
Addressing Outstanding Checks
Managing outstanding checks is an ongoing procedure that requires regular review and specific actions, especially for checks that remain uncashed for extended periods. Businesses routinely identify outstanding checks during their monthly bank reconciliation process. If a check has not cleared within a reasonable timeframe (typically a few weeks), it may warrant further investigation.
Checks that remain uncashed for a long time (often beyond 90 or 180 days) are referred to as “stale checks.” The Uniform Commercial Code states banks are not obligated to honor checks older than six months, though some banks may still do so at their discretion. For these stale checks, companies often void the original payment and may reissue a new check to the vendor if payment is still due. If the vendor cannot be located or does not claim the funds, the amount may eventually be subject to state unclaimed property laws (escheatment), where the funds must be remitted to the state after a dormancy period (typically one to five years).