3 Reasons Outstanding Checks are Subtracted from Bank Balance

Today, you’ll learn why outstanding checks are deducted from the bank balance.

In the reconciliation statement, outstanding checks are generally deducted from the bank balance, which is the transaction account of an organization.

In reconciling deposit accounts, it is crucial to have an accurate understanding of your bank balance.

However, there are instances where the balance shown in your bank statement differs and does not match the records.

These differences are the reconciling items, for example, outstanding checks.

Outstanding checks are deducted from the bank balance.

One factor that can cause this discrepancy is outstanding checks.

A bank balance is usually deemed an unadjusted balance because there could be some in-transit financial transactions.

In this article, we will delve into the reasons outstanding checks are subtracted from the bank balance, providing you with a clearer perspective on this aspect of personal banking.

Are outstanding checks added or subtracted?

Generally, outstanding checks are subtracted from the bank balance to know the available balance.

Those cheques are still not reported in the debits and credits of the bank statement.

However, if the bank recon method used is bank-to-book, all items of outstanding checks are added back to the balance per bank.

This is a method for calculating the book balance from the bank balance.

What is an outstanding check?

For more information, we urge you to click here for the article about outstanding check.

Here are the reasons why outstanding checks are subtracted from the bank balance:

1. Timing Differences

One significant reason why outstanding checks are subtracted from the bank balance is due to timing differences.

When you write a check, it may take some time for the payee to deposit or cash it.

As a result, the check amount continues to be part of your bank balance until it clears.

During that time, the check may become a deposit in transit in the payee’s bank reconciliation.

To maintain accurate financial records, an accountant subtracts the amount of outstanding checks from the bank balance, providing a more realistic representation of the funds available.

2. Avoiding Overdrafts

Subtracting outstanding checks from the bank balance can also be viewed as a precautionary measure taken by the account holder to avoid overdrafts.

Since it takes time for checks to be presented for payment, the account holder deducts the amount of outstanding checks from their available balance to ensure that they do not inadvertently overspend.

This practice helps prevent the occurrence of overdraft fees and keeps the account in good standing.

3. Enhancing Financial Transparency

By deducting outstanding checks from the bank balance, financial transparency is enhanced for both the account holder and the bank.

When a check is written, it may take days or even weeks before the transaction is recorded in the bank statement.

Deducting outstanding checks allows the bank statement balance to reflect the funds that are readily available for use accurately

Likewise, for the account holder, the adjusted bank balance provides a clearer picture of the available funds and helps in effective financial planning.

Definition of Outstanding Checks

To begin our exploration, it is essential to define what an outstanding check is.

An outstanding check refers to a check that has been issued by the account holder but has not yet been cashed or deposited by the payee.

These checks create a discrepancy between the account holder’s records and the bank’s records, as the amount of the outstanding check is still reflected in the account balance but has not yet been deducted from the account.

Relation to the Audit

An audit report is not complete without reviewing the bank reconciliation statement.

It is usually stipulated in the auditor’s engagement letter.

During the audit, each outstanding check is subtracted from the bank balance to calculate the true cash balance, instead of relying on unadjusted bank records (the ending balance of the Bank Statement).

The Bank Balance

The bank balance is the amount of money available in your account as per the bank’s records.

It includes any deposits made to your account, such as direct deposits or cash deposits, as well as any credits from various sources.

This balance is vital for you to determine how much money is available for withdrawal and to keep track of your financial situation accurately.

Importance of Reconciliation

Reconciliation is the process of comparing your records, such as a check register or accounting software, with the records provided by the bank in your monthly bank statement.

This process is crucial to identify any discrepancies or errors, ensuring that your records align with those of the bank.

One of the most common discrepancies encountered during reconciliation dated every end of the month is the existence of outstanding checks.

Online Banking Relative to Outstanding Checks

Efficient management of outstanding checks can be significantly enhanced through the adoption of online banking solutions.

By leveraging the advanced features and capabilities offered by online banking platforms, individuals and businesses can streamline their financial processes, minimize delays, and gain real-time insights into their transactional activities.

Online banking not only facilitates prompt and secure fund transfers but also provides a comprehensive overview of account balances and transaction histories, empowering users to proactively monitor and address any pending checks.

This modern approach not only optimizes financial workflows but also contributes to overall fiscal responsibility and agility in navigating the dynamic landscape of contemporary banking.

Jason John Wethe
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