Are Outstanding Checks Accounts Payable (With Explanations)

Today you’ll learn are outstanding checks and accounts payable on the balance sheet.

Normally, outstanding checks are not considered accounts payable since they are checks previously drawn in favor of payees.

However, when checks are not yet received by suppliers and creditors or when they have become stale, they are generally considered part of Accounts Payable.

These checks are identified through a bank reconciliation process that looks for uncleared checks.

End-users of a bank reconciliation statement, for example, the finance department, may want to know more about the meaning of outstanding checks. Are they related to accounts payable or are they Accounts Payable?

An outstanding check is a check issued but not yet deposited in a bank or not yet cleared. This uncashed check becomes a reconciling item in the bank reconciliation statement.

The total balance of outstanding checks should be deducted from the bank’s cash balance to calculate the actual cash balance in the bank.

Conversely, stale checks are checks that are at least 180 days old, and they are usually considered Accounts Payable.

To understand when outstanding checks become accounts payable, the process must first be described.

The process leading to outstanding checks starts with the obligation to pay suppliers and contractors.

Next, checks are drawn for cash disbursements to pay the obligation, and then, when they are approved, accounting entries are made to record the transactions.

However, in an actual business operation, the accounting entries usually are made first before the release of checks to payees, because accounting has to review the payment or transaction before submitting it to the CEO for approval.

Hence, the checks are already disbursed in the accounting record unless they are canceled and returned.

As a result, unreleased checks are deemed disbursed, although the payees have not received them, and so they are not treated as accounts payable anymore, although the recipients have yet to receive them.

Accounting comes into the picture to strengthen the internal control of the business.

Are outstanding checks considered cash in the trial balance or financial statements?

Outstanding checks are considered cash since checks are instruments carrying an order to the bank to pay the payees. Hence, the issuer’s bank balance is deducted and the recipient’s balance is added with cash.

1. Drawn Checks have not yet been released to payees.

Again, as explained above, outstanding checks are not accounts payable, although unreleased. Not only are they assumed to be released soon, but they are also committed to paying suppliers, contractors, and creditors.

In addition, they are previously disbursed, so outstanding checks are usually not accounts payable.

Or are they?

Conversely, some companies have made distinctions between outstanding checks and unreleased checks. For example, physical inventory of unreleased checks at the end of each month.

It is doable for smaller companies with few financial transactions because of the lower volume of check issuance.

Unreleased checks can be used as a basis to recognize Accounts Payable through a journal entry.

However, for large entities, it is not reasonable to count all unreleased checks, since it requires additional resources and more time. Separating them adds more pressure to bank reconciliation preparation.

Hence, it is recommended to consider unreleased checks as outstanding checks because they are the same and the only difference is the date of release.

Why is the check release date not that important when calculating accounts payable?

The release date is not important because the customers usually claim the checks. It is not usually the company that delivers the payment, since it is beneficial for them.

2. Checks issued to payees have already been received but not yet deposited.

Sometimes, recipients of checks have not made their deposits because they may have overlooked or lost the checks. These checks become outstanding checks at the end of the month.

According to Investopedia, outstanding checks are still a liability of a drawer.

However, it is not really exact because the payees may have already received the checks unless the checks are insufficient (Our Opinion).

Hence, outstanding checks are not yet considered accounts payable in the example.

Note: NSF checks are both credited and debited in the bank statement to inform the depositor.

3. Checks become stale

When checks become stale, they become part of the accounts payable, unless they are replaced or considered an income.

A stale check is a check that has not been deposited within six months after its issue date. After a check becomes stale, it should be recorded in the depositor’s book, added to the balance, and included in the Accounts Payable.

Further, when the obligation remains in the book for an extended period, it is usually recognized in the book as revenue through a journal entry. It happens because the payee has not demanded a check replacement, lost the check, and maybe forgotten about it.

Sometimes, stale checks originate from bank errors. For example, another check number was encoded in the bank record after receipts.


Read also: Accounting for Outstanding Checks on Balance Sheet: Definitive Guide