What Is an Outstanding Check in Accounting?
Grasp the essentials of outstanding checks: their impact on your money and how to ensure your financial records are always precise.
An outstanding check is a common term in banking and accounting that refers to a payment you have issued, but which has not yet been processed by your bank. Understanding how to manage outstanding checks is important for maintaining accurate financial records.
What an Outstanding Check Means
An outstanding check is a check that has been written and delivered to a payee but has not yet been presented to or cleared by the bank it was drawn on. This means the funds for that check have been accounted for in your personal records as if they have left your account. However, your bank balance still shows these funds as available because the transaction has not yet completed its processing cycle. It is considered outstanding until the payee deposits or cashes it and the funds are officially deducted from your account.
Why Checks Become Outstanding
Checks become outstanding due to timing differences between when a check is issued and when it is cleared by the banking system. One reason is the time it takes for the payee to deposit or cash the check after receiving it. Once a check is deposited, bank processing times are involved as it moves through the check-clearing cycle. A payee may also hold onto a check for a period before deciding to deposit it.
How Outstanding Checks Affect Your Balance
Outstanding checks create a temporary difference between the balance you track in your personal records and the balance reported by your bank. While the money for an outstanding check is still in your bank account, it is effectively committed and should not be considered available for other spending. Failing to account for these committed funds can lead to a discrepancy where your bank balance appears higher than your true available cash. This can result in overdrafts and fees if you spend money that is reserved for an outstanding check.
Bank Reconciliation
Bank reconciliation is the process used to resolve this discrepancy, comparing your records to the bank’s statement. During reconciliation, outstanding checks are subtracted from the bank’s reported balance to arrive at an adjusted balance that accurately reflects your available funds. This ensures your financial statements and understanding of your cash position are precise.
Tracking and Handling Outstanding Checks
Tracking outstanding checks is important for accurate financial management. Maintaining a detailed check register where you record the date, payee, amount, and check number is a straightforward method. Many individuals also utilize online banking to monitor their account activity and identify which checks have cleared. Personal finance software or accounting systems can further streamline this process by automatically tracking transactions and assisting with reconciliation.
Periodically review your outstanding checks. A check becomes “stale-dated” after six months (180 days) from its issue date. While banks are generally not obligated to honor stale-dated checks, some may still process them. If a check remains outstanding for an extended period, consider contacting the payee to confirm receipt or inquire about their plans to deposit it.
If a check is lost or remains outstanding for a very long time, consider placing a stop payment on the original check through your bank, which usually incurs a fee, and then issuing a new payment. Voiding a check requires careful record-keeping to ensure proper accounting, especially for checks from prior periods.