In our modern digital world, most of our financial actions are electronic. But, the old-fashioned paper checks are still used in many places. Even though they seem simple, checks have specific terms and rules that can be confusing at times. One such term that often arises in the world of banking and bookkeeping is the “outstanding check.” But what does this mean? Keep reading to find out.
What Is an Outstanding Check?
An outstanding check is a check that has been written and given to a recipient but has not yet been deposited or cashed. It’s a check that hasn’t cleared, so it doesn’t appear in the issuer’s bank account balance yet. These checks are important when matching up all transactions with your bank statement.
Why Do Checks Become Outstanding?
There can be numerous reasons why a check remains outstanding:
- The recipient may have misplaced the check.
- It’s possible that it was forgotten about.
- The recipient could have chosen to deposit it at a later date.
On the other hand, there might be instances when the bank delays in processing the check due to various operational reasons.
Outstanding Checks vs. Stale Checks
It’s vital to distinguish between outstanding checks and stale checks.
- Outstanding check: Refers to checks that haven’t been deposited or cashed yet. They are checks that have been written and given to a recipient but haven’t cleared and are not yet reflected in the account balance of the issuer’s bank statement.
- Stale check: A check that wasn’t presented for payment within a specified period, typically six months after its writing. Most banks may choose not to honor such checks due to the extended duration.
The Importance of Tracking Outstanding Checks
For individuals and businesses alike, tracking outstanding checks is crucial:
- Budgeting and financial planning: Since the amount of an outstanding check has not been deducted from your account balance, being aware can prevent accidental overspending.
- Accuracy in financial statements: Especially for businesses, accurate financial records are crucial for tax purposes and for presenting a precise picture of the company’s financial health.
- Avoiding unclaimed property issues: If a check remains outstanding for an extended period, it may become subject to state unclaimed property laws.
Handling Outstanding Checks
If you’ve issued a check that remains outstanding, it’s good practice to follow up with the recipient. It ensures they received the check and provides a nudge for them to deposit it. Conversely, if you’ve received a check and haven’t deposited or cashed it, doing so promptly is beneficial for both parties involved.
Even as digital banking methods advance, classic tools like checks persist in our financial activities. Understanding terms like outstanding checks is important for money management. Whenever uncertain about banking details, it’s wise to reach out to your bank or seek advice from a financial expert.
FAQHere are the answers to some of the most frequently asked questions regarding outstanding checks.
- What is an example of an outstanding check?
- Imagine you're a business owner who writes a check to a supplier on the 25th of the month. However, when you review your bank statement on the 30th, you notice that the amount of the check hasn't been deducted from your account.
- In this scenario, the check you wrote to the supplier is an outstanding check. It means the supplier hasn't deposited the check yet, or it's in the process of clearing the bank.
- What are outstanding checks for reconciliation?
- During the bank reconciliation process, outstanding checks are vital. When reconciling, you compare your bank statement to your internal financial records to ensure they align.
- Outstanding checks are amounts that you've recorded as payments in your financial records but aren't reflected on the bank statement because they haven't cleared yet.
- By accounting for these checks, you can adjust your statement to match your records accurately, ensuring no discrepancies exist between the two.
- How do you account for outstanding checks?
- Outstanding checks don't require a separate entry in your financial records since they've already been recorded when written. However, when reconciling your bank statement, you'll subtract the amount of outstanding checks from the ending balance of the bank statement. This adjusted balance should then match your internal financial records, reflecting the true amount of funds in your account.
- Are outstanding checks an asset or liability?
- Outstanding checks are neither an asset nor a liability on your balance sheet. They represent funds that have already been deducted from your books but not yet from your bank account. However, from the perspective of the recipient, the outstanding check can be considered a receivable until it's cashed or deposited.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.