What Is an Outstanding Check? Everything You Need to Know Explained Simply

Be mindful of post office conditions and potential delays for seasonality, weather, or staffing issues. You can also call or write to remind the payee that the check is outstanding. If they haven’t received the payment, this may nudge them to notify you to reissue the check. Alex always buys mobiles from a wholesale dealer in New York for a lower price and higher margin after selecting the models and transport medium for the mobiles to be transported from New York to Texas.

• The check may also be delayed if the issuing entity puts off mailing the check for any reason.
• You may have had even cash in the account when you wrote the check, but a month later your account might be lower.
• This example underscores the importance of regularly reconciling bank statements to catch these checks and maintain precise financial records for effective business management.
• It’s important to keep enough money in your account to cover all the outstanding checks at all times.

Checks are often used to pay for inventory, operational expenses and payroll, but the money isn’t disbursed from the business bank account until the check is drawn. Tracking outstanding checks is important for maintaining working capital for on-going operations. Bank reconciliations are an ideal place to track outstanding checks. During the purchasing and accounts payable process, cash disbursements are often-times remitted using business checks. These instruments are among the oldest and most commonly used to pay for everything from raw materials and payroll to capital projects. Bank reconciliations and cash disbursement reports are part of the accounting system used to track outstanding checks, helping accountants and business owners monitor cash reserves.

The payee may cash the check immediately or might hold onto it for months. Checks that remain uncashed for long periods of time are called stale checks. This period can range from 60 days to six months.Sometimes a payee forgets about the check or loses it without notifying the payor. The payor has no control over when the payee will cash outstanding check definition or deposit the check. The only thing the payor can do, for a fee, is stop payment on the check. The payee cannot cash or deposit the check once a stop payment has been issued.The payer’s bank has no way of knowing that a check has been written until the payee deposits or cashes the check.

• One way to avoid this occurrence is to maintain a balanced checkbook.
• The payor gives it to the payee and notes the amount of that check as a “pending” payment until the check fully clears and the account balance is adjusted by the bank to account for the payment.
• Someone else could be able to change the payee name or the amount if a check is misplaced or stolen before it is taken to the bank.
• Outstanding checks are typically identified as part of the bank account reconciliation process.

An outstanding check is a check that a recipient fails to deposit. Once such checks are finally deposited, they can cause accounting problems. Furthermore, checks that are never cashed may constitute “unclaimed property” that is turned over to the state.

What to Do About Outstanding Checks

Unaccounted-for outstanding checks can disrupt the delicate balance of incoming and outgoing funds. Keep track of it and contact the payee if you suspect they’ve forgotten or misplaced the check. If you’ve received an outstanding check, deposit or cash it promptly. Since the bank balance does not yet reflect the check amount, it can present a misleading picture of your actual financial situation. They are key components of transactions involving payments or transfers. Learn about outstanding checks in finance, including the definition, risks involved, and effective ways to avoid them.

Accounting Dictionary

You can also commit to growing your financial literacy by learning about more topics around bank accounts and payment. PNC has many useful articles to help you make the most of your money. When the check is cashed or deposited, it is no longer considered outstanding, and the payor can reconcile the payment with the pending transaction. Checks are simple financial tools that depend on both the payor and payee to take action to complete the payment. Outstanding checks that remain so for a long period of time are known as stale checks. Last, outstanding checks might have an impact on management of the cash flow.

Business Accounting

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For a business, this could mean difficulties in meeting operational expenses or taking advantage of growth opportunities due to the perceived availability of funds that are, in reality, already allocated. Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Businesses that mishandle these kinds of accounting situations are effectively in violation of the law.

Sarah then makes another journal entry, debiting the rent expense account and crediting the cash account by $800. Fortunately, banks don’t have a legal obligation to honor checks written more than six months in the past. If the old check isn’t six months old, or if you want an extra layer of protection, two strategies can protect you. An outstanding check example could be a rent check you mailed to your landlord, but they have not deposited it yet.

In U.S. accounting textbooks, every check that has not been cleared is termed an outstanding check. This is because the bank still needs to clear it on the payer’s end, as it is yet to be presented, and the status of its clearance remains uncertain. Imagine a scenario where Sarah, a small business owner, writes a check for $800 to pay for monthly rent on her office space. She records the transaction in her accounting system by debiting rent expenses and crediting cash. Some businesses print “Void after 90 days” on their checks to encourage recipients to deposit checks more promptly. Most banks will continue to honor checks for the full 180 days, but that isn’t guaranteed.

How Do I Reconcile Outstanding Checks with My Bank Statement?

This documentation will come in handy if you need to prove to state regulators that you made reasonable attempts to complete the payment. If an outstanding check is cashed after you asked a bank to stop the payment, you will be responsible for proving that you took the necessary steps to complete the payment. However, if the payee delays depositing the check, then the payment does not clear the payor’s account. The amount of the check still cannot be used by the payor, as it’s promised to the payee, even though the bank account balance has yet to reflect the check payment. With banking activity becoming increasingly electronic, another way to avoid writing a check and forgetting about it is to use the checking account’s online bill pay service. This should provide real-time information about the total dollar amount of checks outstanding and the total dollar balance present in the account.

Unfortunately, outstanding checks can be a common problem and one of many complications for business owners. This is why your (or company) bank accounts need to be reconciled with the bank statement. There is a discrepancy between what your checkbook or accounting system says you have in your account and what the bank reports on your monthly statement.

Furthermore, if the payor’s account lacks sufficient funds, the check does not clear. If a check was issued to you and it’s still outstanding after six months, contact the check issuer and request a replacement. As mentioned above, you may need to return the original check or sign documents confirming the check is lost or destroyed.

Related AccountingTools Courses

One way to avoid this occurrence is to maintain a balanced checkbook. This can help prevent any unnecessary NSFs if the payee decides to cash the check at a later date. Accounting inconsistencies may arise if outstanding checks are not reported and tracked in the appropriate manner.

Because of this, keeping correct financial records can be difficult, and it may lead to problems during audits or when reconciling finances. For example, payments may show as being paid but if the cash has not yet been debited from the account, there may be inconsistencies worth reconciling. A check is a financial instrument that authorizes a bank to transfer funds from the payor’s account to the payee’s account. When the payee deposits the check at a bank, it requests the funds from the payor’s bank, which, in turn, withdraws the amount from the payor’s account and transfers it to the payee’s bank. When the bank receives the full amount requested, it deposits it into the payee’s account. First, let’s start with a clear explanation of what outstanding checks actually are.

Putting a stop payment on a misplaced or stale check may prevent issues down the road, especially if there’s a concern that it could fall into the wrong hands. However, this doesn’t always solve the problem, as it costs a fee to the payor and is only valid for a limited time. Check to see that the contact information is correct, as checks may go missing simply because of an incorrect mailing address. Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing.

Categorised in: Bookkeeping

This post was written by vladeta