Want to learn what happens to a stale check? Read on.
A stale check could confuse most people who have no accounting background. For instance, are 180-day uncashed checks adjusted, replaced, or ignored? These are the questions that are answered with details below. In addition, do stale checks increase or decrease a cash balance and an Account Payable account? The effects of adjusting stale checks are also discussed below. Furthermore, what is the effect of a stale check on the availability of funds? It is the most important effect of stale checks.
Stale checks are monitored thru a bank reconciliation, which is usually done monthly. For instance, with reconciliation, all outstanding checks are listed on dates when they are issued. The dates are used for the identification of undeposited checks that are over 180 days. Indeed, stale checks are readily recognizable when the dates are sorted from the oldest to the newest outstanding checks. Sorting can be done using an Excel Spreadsheet. Thus, preparing bank reconciliation reports is needed to find checks that are still outstanding but are already six months old.
1. Considered invalid or expired
A check, which is uncashed for over six months, is usually considered stale or expired. For instance, many banks would not accept them anymore. They would immediately return stale checks to a depositor. Also, the Uniform Commercial Code, which is usually followed by most banks, had set the validity period of an issued check, which is also six months. Even other countries practice the same number of months. However, the number of months depends on a bank’s state. Some states may fix it for up to three to four months.
Stale checks could still be undeposited for many reasons, including unknown cases. For example, checks were lost and forgotten by payees. It is common for those who have no cash books and records. Also, checks might have not been released to payees. Unreleased checks could have been included in the stale checks, which will never be cleared. In addition, with poor recording, payees could have thought that checks are already deposited in a bank. The only way to verify this is to contact check recipients.
2. Adjusted through an accounting entry
Checks that are already stale and expired are adjusted with an accounting entry. For instance, for all expired checks, cash is debited, which increases the cash balance. An amount is returned to cash for a payment that is not completed. In addition, accounts payable are usually credited for recognition of an obligation to a payee. Payment, in this case, is not fully completed for goods or services, so an obligation is usually restored, which is added to Accounts Payable account. Thus, an accounting entry for an expired check is just a reversal of a cash outflow, which was deducted from the cash balance when a check was issued. It is the same with a cancelation of a valid check.
Stale checks could affect the reliability of the cash balance that is reported in a balance sheet when its aggregate amount becomes significant. For example, an unadjusted 10 Million Dollar stale check could be significant while a One Million Dollar total amount could be immaterial for a One Billion Dollar cash balance. It does not mean that small amounts of stale checks are ignored. However, as a good practice, all uncleared checks that are already six months old are usually reverted to a Cash-in-bank account.
3. Taken out from the list of outstanding checks, which increases available funds
A Cash-in-bank balance recorded by a depositor increases when a stale check is reversed. Indeed, because a check is immediately deducted when issued, it is also added back when it becomes stale. It corrects the imbalance between a book and a bank balance. The book balance is lower than the bank balance in this case. Thus, a depositor’s cash balance is usually increased when checks are reversed.
There are more funds when a stale check is added back to the book cash balance. For instance, an organization could decide whether to spend the newly added-cash for operating expenses. It is usually a common practice for most businesses. In addition, a payment that can also be made thru a check could be sent again to a payee. The second option is more about enforcing a moral obligation to suppliers and contractors. However, some organizations would send another check only when there is a request which comes from a payee. It could be due to cash scheduling of payments to supplies, contractors, creditors, and others.
Some organizations might replace stale checks and subsequently could inform the payees. For example, they would send letters to check recipients about undeposited checks, which already include replacement checks. Is this common? I doubt, though. In addition, if payees did not respond, additional letters can be sent. It is good, which is not common though. However, some companies would not inform suppliers and contractors about stale checks. They might do it to delay the payments. However, as a moral obligation, issuing check replacements would have been better. Paying for rendered goods and services is an obligation that should have been paid.