Today, you’ll learn what happens if you have an outstanding check.
Generally, having several outstanding checks does not constitute a set of accounting problems. Indeed, various sets of checks would not clear at the end of a month. The reasons are the timing differences between deposits of the checks and the recording of the bank. It can be immediate or it can be delayed. Also, several checks remain undeposited at the beginning of the next month. The recipients usually have to schedule check deposits to save on transportation. Truly, most of the outstanding checks clear in the bank within a few banking days. The payees have to deposit the checks to have available funds. So, there is nothing to worry about with outstanding checks.
Checks issued near the end or at the last banking day are often deposited on the next month. In general, banks are closed during weekends. They could accept check deposits with their automated machines on weekends but they will record them only the next banking day. Also, when checks are issued on a Friday, they are usually sent to the bank only on Monday unless they have time. In addition, some recipients would not deposit the check immediately. It is just that they have something to do. Hence, outstanding checks have many causes.
1.The clearing of outstanding checks is eventual
Check recipients are expected to deposit their check collections sooner. First of all, the benefit of cash inflow is a good motivation. People want money for their goods and services so they need to deposit all check collections as early as possible. Also, the payees need the cash inflows for their personal and business reasons. Business owners need cash inflows for their operational needs. Next, it is normal to deposit checks right away to see if it does not bounce. So, having outstanding checks at the of the month is common.
But there are instances when checks were recorded in another bank account when they were issued. Of course, the errors in the recording increase the outstanding checks of another bank account. Also, its bank reconciliation will show outstanding checks that will never be removed from the outstanding list unless there are accounting adjustments. Furthermore, it would make the accounting records unreliable when the total amount of incorrect outstanding checks are substantial. So, correcting errors in recording removes all outstanding checks that are not supposed to be included in a bank account.
2.Outstanding checks are deductions of the bank statement balance
Deducting outstanding checks from the bank statement balance calculates the actual available fund balance. Indeed, uncleared checks are taken into account when determining the adjusted bank balance. The adjusted balance is the available cash in a bank. Also, although outstanding checks are normal, they will reduce the available funds of an entity in which they can use for business operations. Next, when the bank balance has enormous amounts of outstanding checks, it could mean that the fund available for disbursements is limited. So, top management can avoid releasing NSF checks by monitoring the total amount of outstanding checks.
The formula is:
*Adjusted Bank Balance + (plus) This month’s collections –(minus) check issuances = Available Fund Balance
* Adjusted Bank Balance =Bank statement balance + (plus) deposits in transit – (minus) Outstanding checks
3.Lost outstanding checks are reverted to Cash in Bank and Accounts Payable
We know that uncleared issued checks are normal at the end of any month but they should be reverted to Cash and Accounts Payable when lost by recipients. For instance, when outstanding checks are over a month, communicating with the payees could get information about undeposited and lost checks. It is not the job of the check issuer though. Also, check receivers could send check replacement requests to the issuer/check drawer. Some businesses usually require an Affidavit of Lost, signed by an Attorney, before even entertaining requests. Hence, communicating with payees could identify lost checks. Contacting check receivers about the undeposited checks will give them information.
Part of the accountant’s job is to monitor outstanding checks. For example, all long outstanding checks are communicated to the check recipients to know why no deposits were made. However, some companies designate liaisons for tackling undeposited checks. It is a good act to assist the accountant but most of the time it is expensive. Next, after identifying the causes, the outstanding checks could be reverted to cash, and the available fund increases. Hence, one of the accountant’s jobs is to monitor the accuracy of the outstanding checks.
4.Some outstanding checks become stale
Checks can remain outstanding for six (6) months or more. For instance, a company gives financial assistance for social services but the payees did not claim the checks. Sometimes the people asking for help did not return to claim checks. Someone may have assisted them so they did not need the financial assistance, anymore. Also, when checks are lost and the check recipients did not bother to ask the issuer for replacements. Maybe they thought that claiming the checks would cost them. This is common with retention claims because the costs could exceed the benefits. One time a supplier did not claim a $5,000 retention because the airfare is about $7,000. Furthermore, the cause will never be determined. It is just that payees have not claimed the checks or have not deposited them. Thus, stale checks, which are also still outstanding, are reverted back to Cash and Accounts Payable to recognize that the checks are already invalid.