Outstanding Checks on Balance Sheet: The Definitive Guide

A bank reconciliation statement usually lists down all outstanding checks, but are they part of a balance sheet?

Outstanding checks on a balance sheet mean that there are still uncleared checks at the end of the month. They are probably released to payees but not yet cleared in a bank. However, there is something more to them than what is currently understood.

This post discusses when an outstanding check matters to the balance sheet.

Outstanding checks reduce the bank balance because they are soon to be cleared in a bank. They are already deducted from the depositor’s cash book balance after issuance, but sometimes they are still unreleased to payees.

Since they are deducted from the cash book balance, they also reduce the total amount of assets in the balance sheet, as well as Accounts Payable, if related to business operation.

The issuance of checks is related to the business operation when it is paid to suppliers and contractors.

What is an outstanding check?

The outstanding checks usually appear in a bank statement within three days. They are checks written for payment but are still in transit. It is normal to have them in the bank reconciling items of a bank reconciliation statement.

In addition, they do not significantly influence a balance sheet.

However, if there are many accounting errors, outstanding checks can influence the reliability of a balance sheet. For example, another bank account is credited for check issuance instead of the correct one.

Next, incorrect check numbers in an accounting entry can increase the number of outstanding checks in a bank reconciliation statement, although the cash balance is correct.

Background of an outstanding check

A written check becomes outstanding when it is already either released or unreleased to payees, but already recorded in the depositor’s record as disbursed. Conversely, some accountants believe unreleased checks are not considered outstanding checks and must be corrected through adjusting entries.

However, it is known that counting the number of unreleased checks and totaling their amounts is laborious, which can delay the preparation of financial reports.

Hence, all recorded check disbursements at the end of each much are deemed outstanding unless they have been cleared in a bank.

Accounting cycle of a check

In a regular business, an outstanding check starts with the submission of a purchase request for approval. After approval of the purchase request, a purchase order is made to a supplier (after a canvass is made).

When a supplier accepts the purchase order, they sign the P.O. and a contract is made. The contract becomes an obligation and it should be submitted to a budget office to recognize an obligation.

Once the goods or services are delivered, the transaction should be recorded in the Accounts Payable.

To pay the accounts payable, a check is usually written and also reported as disbursed by accounting, and no distinction whether it was already released to a payee.

The check becomes outstanding if still uncleared at the end of the month.

Bank reconciliation process for outstanding checks

How does accounting identify outstanding checks? Listing outstanding checks is uncomplicated because check numbers are already included in the bank statement. For example, the VLOOKUP function of excel can help match check numbers and disbursement amounts between a cash book and a bank statement.

Hence, the unmatched checks are usually outstanding checks.

Bank reconciliation monitoring

Outstanding checks must be monitored since uncleared checks for over a month may result from erroneous accounting entries. For example, another bank account was credited instead of the correct one, and mistakes were made in the recording of check numbers.

To correct erroneous recording of check numbers, review if the check numbers in the outstanding checks are within the series of previously issued checks. If they are not, then they should be recorded in another bank account.

These accounting errors do not affect the balance sheet because the cash balance is the same. However, they must be corrected to have a more reliable accounting record.

Financial Statement – Balance Sheet

Sometimes, outstanding checks do really influence the balance sheet. For example, after year-end, management may want to reduce the number of dividends that would have been released to stockholders to fund the business for the next few years. They may issue fictitious checks to reduce cash balances. Although these checks are unreleased and money is not lost, they appear to reduce the cash balance on the balance sheet.

Hence, outstanding checks increase, and management can declare low dividend payouts.

Later, the fake checks are canceled, and the management can continue its normal operation with enough funding.

Uncashed check

Uncashed checks form part of the outstanding checks in a bank reconciliation statement. They do not increase or decrease a balance sheet because they are valid.

However, if they are actually lost by payees, they may never clear in a bank.

Stale check

State checks reduce the balance of cash on the balance sheet. Hence, they must be corrected by adjusting entries by increasing the cash balance and accounts payable on the balance sheet.

We provide a bank reconciliation service as part of our accounting services. Contact us.