3 Reasons to Add Outstanding Checks

Generally, outstanding checks (OCs) are not added to the Cash book balance. First of all, they are valid check disbursements of an organization but have not yet cleared in a bank. The checks are duly substantiated with Official Receipts, vouchers, and other supporting documents. In addition, they have not yet been cashed by payees. The reasons are often unknown to the drawer. Also, those checks will eventually be cleared in the next ensuing months unless there are problems.

However, outstanding checks are aggregated every month on a bank reconciliation statement. For instance, all uncleared outstanding checks from the previous months are added to the current month’s OCs. Also, only cleared checks are taken out of the outstanding checks list to balance the Cash balances of both the book and the bank. Furthermore, the bank reconciliation statement will not be balanced without adding all outstanding checks.

Book transactions consist of all records of transactions of a depositor. First of all, it includes money deposits and checks issuances. These transactions become in transit or outstanding when a bank has not recorded them yet. Also, the transactions can include check payments that are not yet deposited by the payees. These are the outstanding checks. However, some transactions are not recorded so a bank reconciliation is needed.

Outstanding checks can be confusing to people that are without accounting subjects at school. For instance, one can ask what is the purpose of outstanding checks. Most users of bank reconciliation statements may wonder why OCs are part of the bank reconciliation report. Also, do we add them or subtract them from the cash balance of the cash book? The answer depends upon the type of reconciliation report. In addition, can we consider them as part of cash? The outstanding checks have not yet been cleared in the bank which confuses the non-accountants, even more.

1. The previous month’s uncleared outstanding checks are combined or added to the current month’s outstanding checks to balance a bank reconciliation statement

All prior months’ and current months’ outstanding checks are added together when they are still uncleared in the bank. For instance, all prior OCs are reconciled with the bank statement, and the remaining uncleared checks are combined with the latest month’s outstanding checks. In-transit checks are removed from the list when cleared and the remaining merged.  Also, the previous and latest uncleared checks are aggregated to balance the bank reconciliation report. This is most common if the adjusted balance of both book and bank is not equal. Furthermore, it is done to monitor the correct total balance of OCs.

2. The Book-to-bank bank reconciliation statement requires adding the outstanding checks

The book-to-bank reconciliation method starts from the book balance to the bank balance. For instance, all disbursements that are not yet cleared in the bank are added to the book balance. This method will compute the bank balance which is more important in this type of reconciliation. Also, these include checks and fund transfers not yet recorded in the bank. They are not yet deposited by payees or the fund transfers were done on the weekend. Banks would likely reflect those transfers on the bank statement usually on the next banking day. So outstanding checks are added back to the book balance to calculate and reconcile with the bank balance.

We don’t recommend a Book-to-Bank bank reconciliation statement because it does not calculate an entity’s actual Cash in the Bank balance. First of all, the reconciliation only identifies reconciling items to calculate the bank balance. Some examples are adding outstanding checks and deducting deposits in transit to the book balance. Also, the bank balance is not usually the actual cash available in the bank. This is not useful for the management of an entity. So, we recommend the Adjusted method of bank reconciliation statement. It computes the correct cash balance of a business hence the management knows how much available funds it has at the end of the month.

3. Stale outstanding checks are added back to the book balance in the bank reconciliation statement

Outstanding checks are added back to the book balance when they become stale. For instance, checks that have not cleared in a bank and are already six months and more are reverted to the cash balance of the depositor. They become part of the obligation of the check drawer. Also, stale checks are already invalid. Banks and financial institutions will not accept them anymore. They will not debit the account of the depositor because the checks became useless. Furthermore, in accounting, they are debited to Cash in the bank and credited to accounts payable accounts.

The cause of why there are stale is usually unknown. First of all, the check drawer will not contact the payees about the undeposited checks. It will benefit the issuer not to inform the payees. They want their payees to delay cash outs. In addition, the checks are maybe lost. Some examples could be payments to people without cash records. They may have forgotten about them. Furthermore, outstanding checks are monitored anyway no matter what the reasons are.

Wrap Up

Outstanding checks are not added to the cash balance unless the bank reconciliation method used is book-to-bank. For instance, the current OCs are added back to the balance to calculate the bank balance. Checks in transit have not yet reached a bank. They are still to be deposited by the payees. Also, in this method, the aim is to balance the book balance with the bank balance. All transactions in the book are added or deducted back because a bank not record of the transaction, currently. Furthermore, OCs are combined with previous months’ uncleared checks. So, they are added together this time.