Outstanding Check

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21 Aug, 2024

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An outstanding check is a check that has been issued by the payer but has yet to be cashed or deposited by the payee. These checks help to reflect financial transactions in accounting records accurately.

Businesses dealing in goods trade involve the transportation of goods. They may face delays or degradation if not delivered on time and, hence, must ensure that the payor or check issuer keeps the amount available for clearing the yet-to-be-presented check at the bank. However, till the expiry date of the check, it remains a liability to the check issuer. If the payee keeps any outstanding check for too long, then it runs the risk of getting void.

What is an Outstanding Check?

An outstanding check refers to a check that has been issued by the payer and has not yet been deposited by the payee.
If a check that is still outstanding has passed its expiration date. Then, the payee must visit their bank and provide a check stop instruction while paying a charge for it.
For reconciling accounts, one subtracts the amount of the outstanding checks bank reconciliation from the ledger. Still, in the case of deposits in transit, for reconciling accounts. Here, one adds the amount of the deposit in transit to the bank statement.

Outstanding Check Explained

An outstanding check refers to a check that has been written by a business but has yet to be deposited by the recipient. Even though the bank statement may not display it, the payee's account incurs a debit for the amount of the outstanding check.

An individual or business can issue a check to the payee. Therefore, this can be termed an outstanding check, like a car finance outstanding check issued for the purchase of a car on loan. It really matters to bookkeepers and financial accountants of a business to balance the accounting books at the closing of every month. Whenever anyone issues such checks, the issuer must record the check numbers, amounts, dates, and payees in the check register. The journal entry for an outstanding check involves recording the check when it is issued and then adjusting the records when the check is eventually cashed or deposited

Failure to accurately record the details of this may lead to the misallocation of the reserved cash for that check to other tasks, despite due diligence. Thus it makes the bank fail to clear the check when resented to the bank by the payee. One must actively track outstanding checks until their expiration date and coordinate them with the associated bank account.

Additionally, the issuer must regularly contact the payee to inquire about the status of the check. This also helps to understand the intended use of the check in case the payee loses or faces check theft. In that case, the payor must immediately inform its bank to stop the payment of a check. Therefore, companies must perform regular bank reconciliations of outstanding checks to catch discrepancies early and maintain accurate financial records.

When Outstanding Check Turns Void

If the check outstanding has breached the expiry period, then the payee must:

Go to their bank and issue check-stop instructions by paying a certain fee for it.
After the bank completes the stop check, one should actively mark the entry of that check as a void check in the check register.
Contact the payee to inform them of the void status of their check.
The payor must actively inquire with the payee about the preferred payment methods in the event that the check becomes void.
The payor may also issue another check in the name of the payee after the turning of the check as void.

Examples

Let us go through a few examples to understand these types of checks.

Example #1

Let's say Alex has a mobile shop in Texas. 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. He issues an outstanding check, valid for one month, upon the delivery of the mobile shipment from the dealer to the shop. The wholesale mobile dealer promptly presents the outstanding check to their bank and encashes it for credit to their account.

Example #2

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.

However, by the end of the month, the landlord still needs to deposit the check. When Sarah receives her bank statement, it shows a balance of $5,000, but her accounting records indicate a balance of $4,200, taking into account the outstanding rent check.

During the outstanding check bank reconciliation process, Sarah identified the check and adjusted her records accordingly. She debits the outstanding checks account and credits the cash account by $800 to reconcile her book balance with the actual bank balance. This adjustment ensures that her financial statements accurately reflect the funds available in her business account, considering the outstanding check.

In the following weeks, the landlord deposits the $800 check. Sarah then makes another journal entry, debiting the rent expense account and crediting the cash account by $800.

This example underscores the importance of regularly reconciling bank statements to catch these checks and maintain precise financial records for effective business management.

Outstanding Check vs Deposit In Transit

Let us learn about the differences between the two using the table below:

Outstanding Check	Deposit in Transit
These checks have been recorded in the firm's accounting ledger but have not been debited from the bank account.	Deposits in transit are the deposits made right after the bank statement was generated and added to the statement.
They help reconcile account ledgers and bank account statements.	It means the amount has been given to the firm or individual but has yet to be credited to their bank account.
The amount in these checks gets debited from the firm's accounting ledger.	Here, the amount received gets added to the general ledger of the firm or individual.
There is only a deduction of the amount from the firm or individual's bank account once the check gets presented and cleared to the account of the payee.	It increases the firm's total fund, but the bank account does not reflect it.
For reconciling accounts, one subtracts the amount of the outstanding checks bank reconciliation from the ledger.	For reconciling accounts, one adds the deposit amount in transit to the bank statement.

Frequently Asked Questions (FAQs)

1. Is an outstanding check considered cash?

Once presented to the bank and cleared, the check transforms into obtainable cash. However, it may incur banking charges or take time to cash, establishing it as a monetary instrument that ensures payment after proper due diligence by the bank. Furthermore, if the payor's account lacks sufficient funds, the check does not clear.

2. Is an uncleared check an outstanding check?

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.

3. How does an outstanding check affect your bank balance?

Because the check written for a payee has not yet been presented to the bank for clearance, the company's funds will reflect a deduction, but the bank balance will remain unchanged. As a result, the company's bank balance will show a more excellent balance than its actual amount of cash in hand.

4. Does one add an outstanding check to the balance sheet?

When preparing financial statements, one doesn't directly add outstanding checks to the balance sheet. Instead, they consider it during the bank reconciliation process to ensure that the cash balance reported on the balance sheet is accurate.