Want to learn is an outstanding check part of cash?
Read on.
Written By Kevin Mil - Author/Founder
Are outstanding checks considered cash?
An outstanding check isn’t included in the cash balance because it’s authorized by the drawer and already issued to a payee.
In this post, we’ll explain why it’s excluded, so you can clearly understand the reasoning.
However, if the check becomes stale, it is then included in the cash balance.
1.Already issued to a Payee
When an account holder signs a check and issues it to a payee, the funds are considered transferred, even if the check hasn’t been cashed by the bank.
A check essentially serves as an instruction from the account holder (the drawer) to the bank (the drawee) to pay the specified amount to the payee.
As a result, the bank is obligated to honor the check and release the funds to the payee.
Because the money has already been transferred to the payee, the issuer should not include the outstanding check in the bank balance.
Once the check is signed, the drawer no longer owns that money since ownership transfers at that moment.
The payee can cash the check at any time and will receive the funds immediately, provided there are sufficient funds in the account.
If the check drawer counts outstanding checks as part of cash, the Cash in Bank balance in the cash book can be overstated.
This increases the risk of a bank overdraft, which may lead to a negative balance in the bank statement and result in surcharges and penalties.
2.Valid deduction to the bank balance
We’ve learned that when a check is signed and issued to a payee or bearer, it represents a transfer of money.
The bearer can then deposit the check into their bank account or cash it at the bank.
This makes it a valid deduction from the drawer’s bank account.
For this reason, in a bank reconciliation, outstanding checks are typically deducted from the unadjusted bank balance.
Including outstanding checks as part of the cash balance or encasing them in the bank’s records can lead to an incorrect bank balance being reported by the drawer.
This discrepancy in records may result in fines and penalties, especially during times when cash is tight, as it increases the risk of overdrafts.
3.Not yet stale or still valid
When a check hasn’t become stale—meaning it hasn’t been deposited or cashed at the bank within six months—you can’t consider it part of cash.
However, some banks treat checks that remain uncashed for five months as stale.
At that point, you may consider the outstanding check as part of cash.
Avoid immediately including a stale outstanding check as part of cash with a journal entry and using the funds for your business.
Some states and cities require that stale checks be turned over to the government.
While you can record it as part of your cash, you can’t use it for business operations, and you need to set up a payable to the government.