Today, you’ll learn outstanding checks in a bank reconciliation.
Written By Kevin Mil - Author/Founder
Outstanding checks are checks that an issuer has drawn and sent to the payee, but the bank has not yet cleared.
These checks may remain uncleared for various reasons, such as the payee depositing them after the bank’s cut-off hours for processing or the payee losing the checks before depositing them.
It’s important to note that while the checks are outstanding, they are already in the possession of the payee, even though the bank has not yet processed them.
When payees deposit checks near the end of the month, those checks will likely clear the bank in the following month.
However, if the payees deposited the checks earlier, the bank will clear them soon, and the accountant can remove them from the list of outstanding checks.
The preparer of bank reconciliation must ensure that all checks included in the list of outstanding checks have already been issued to the payee.
Sometimes, unreleased checks incorrectly make their way onto the outstanding checks list.
If the preparer discovers any unreleased checks on the list, they should report or discuss the issue with the accounting department.
Proper communication between the preparer and the accounting department is crucial for resolving any discrepancies related to unreleased checks appearing on the outstanding checks list.
Emphasizing the importance of only including issued checks in the outstanding checks list will help maintain accurate records.
How to Handle Outstanding Checks?
- Deducted from the bank statement balance
- Consolidated with prior months uncleared checks with the current month’s uncleared checks
- Can only be removed if cleared by the bank or become stale.
Outstanding checks should be removed from the bank balance because they are not part of the actual available funds.
The company has already issued these checks to payees after obtaining authorization and a signature from the designated approver.
Even though the checks have not yet cleared the bank account, the company no longer has access to those funds and must exclude them from the stated balance.
Outstanding checks from previous months that are still uncleared are consolidated or included in the current month’s outstanding checks to calculate the adjusted bank balance.
This ensures that the actual available funds are shown.
These checks remain on the list until the bank clears them or they appear in the debit section of a bank statement.
The accountant can remove checks from the list when they become stale, which typically occurs if they remain uncleared for six months after their issue date.
This process ensures accurate tracking of outstanding checks and helps maintain proper bank reconciliation.
Companies should regularly review their outstanding check list to identify and address any long-standing items.
Doing so improves their financial record-keeping and cash flow management.
See: Adjusted Method of Bank Reconciliation
Risks and Indirect Benefits
Failing to properly monitor outstanding checks can lead to significant risks for a company.
One major concern is the potential for overdraft.
If company management mistakenly believes funds are still available and issues a check that causes an overdraft, the accounting department typically bears the responsibility also.
As the accountant or preparer of the bank reconciliation, you could be held accountable for such errors.
This situation underscores the importance of diligent check monitoring and accurate financial record-keeping to prevent costly mistakes and maintain the company’s financial integrity.An indirect benefit to the company arises when a check becomes stale.
In this case, the funds may return to the cash balance and be credited to the correct payable account.
However, the outcome depends on the laws and regulations of the state where the business operates.
Some states require businesses to turn over stale checks to the government, while others allow companies to reclaim the funds.
Possible Consequences (Payee)
Banks typically refuse to honor outstanding checks that remain unpresented for six months or more.
This situation can create significant inconvenience for the payee, who must then request a replacement check from the issuer.
Obtaining a new check often proves burdensome, as it requires additional time and effort from both parties.
To avoid such complications, payees should promptly deposit or cash their checks, while issuers should maintain accurate records of outstanding payments to facilitate smoother financial transactions, to contact payees if necessary.
Adjustment Entries
The usual entry when the check become stale or still unreleased is:
Debit: Cash in Bank
Credit: Accounts Payable or an appropriate Payable account