Definition
An outstanding check refers to a check that a payee has not yet deposited or cashed. The check is still active and can be presented for payment, but it’s unaccounted for in the payer’s bank balance. Until the recipient cashes the check, it remains outstanding and can create discrepancies in the payer’s accounting records.
Phonetic
The phonetics of the keyword “Outstanding Check” would be spelled “/aʊtˈstændɪŋ tʃɛk/” in the International Phonetic Alphabet. In simple English, it would be pronounced as “owt-stan-ding chek”.
Key Takeaways
- Definition: An outstanding check is a check that has been written by an individual or company and presented for payment, but has not yet been processed by the bank or financial institution on which it is drawn, and therefore, it has not been deducted from the account’s balance.
- Impact on Balance Sheet: Outstanding checks are important in accounting because they affect the reconciling of the company’s bank statements and cash accounts. Until the check is processed by the bank, the company’s bank account will show a higher balance than what is actually available for use.
- Tracking and Management: Poor management of outstanding checks can lead to financial challenges for a business, including overdraft fees or incorrect financial reporting. Therefore, it’s crucial for businesses to stay organized and keep track of all outstanding checks until they are processed.
Importance
An outstanding check is crucial in business and finance because it represents a financial obligation that has yet to be fulfilled. It is a check that has been written and recorded in the issuer’s ledger but has not yet been cleared by the bank, creating a disparity between the business’s accounting of its funds and the actual bank balance. This discrepancy can lead to misconceptions about the firm’s available resources, potentially causing financial mismanagement or miscalculated projections. Hence, accurately accounting for outstanding checks is critical in maintaining an accurate portrayal of a company’s financial health.
Explanation
An outstanding check primarily serves as an instrument for an individual or corporation to make payments or transactions without needing to handle cash directly. For instance, a business might use an outstanding check to pay its suppliers or employees, as it offers the convenience of handling large payments securely and efficiently. This payment method ensures accurate record-keeping because each check has a unique number, helping entities track and monitor their transactions, thus contributing to robust financial management.Another pivotal role of an outstanding check lies in the process of bank reconciliation. This is a vital accounting task, where a company ensures its records match the bank’s records. Since an outstanding check represents an amount deducted from the company’s records but not yet from its bank balance, it needs to be accounted for in this process. For the checks to be cleared, the recipient must deposit the check at their bank, and the issuing bank must confirm the availability of sufficient funds to cover the check’s amount. Thus, an outstanding check plays a crucial role in maintaining the accuracy and reliability of a company’s financial reporting.
Examples
1. Corporate Payroll: A company may issue paychecks to its employees on a particular date of each month. Suppose a check dated May 1st, 2021 has been issued but not yet been presented for payment by an employee due to personal reasons. This issued check, remaining uncashed as of the company’s financial statement date (May 31, 2021), is an example of an outstanding check.2. Retailer Payments: A retail store might write checks to a distributor to reorder products. If the distributor hasn’t cashed those checks by the time the retailer prepares its monthly financial statement, those checks are considered outstanding checks. They have been recorded in the retailer’s books but not in the distributor’s or the bank’s records.3. Rent Payments: If a tenant pays their monthly rent via a check, but the landlord hasn’t yet deposited the check to their bank by the time they close their monthly finance books, this check is an outstanding check. The tenant has accounted for this expense, but the landlord’s bank statement doesn’t reflect this transaction yet.
Frequently Asked Questions(FAQ)
What is an Outstanding Check?
An outstanding check is a financial instrument that has been written by an entity but has not been cashed or deposited by the recipient yet. It is essentially a check that hasn’t cleared the bank.
Are outstanding checks considered as liabilities?
Yes, outstanding checks are considered short-term liabilities until they are cleared. Once the recipient cashes the check, the bank clears it and the liability is removed.
How does an Outstanding Check affect the bank reconciliation process?
Outstanding checks are deducted from the bank’s balance in the reconciliation process because the bank would not yet know about them or have deducted them from the account.
Can an Outstanding Check expire?
Yes, checks that are not cashed or deposited within a specific timeline (usually 6 months) can become void depending on the issuer’s policy.
What should I do if I find an Outstanding Check when balancing my books?
If you still have contact with the person or entity to whom the check was written, let them know. If you cannot reach them or they have lost the check, you should issue a stop payment order and may need to write a new one.
What is the effect of outstanding checks on cash flow statement?
The outstanding checks do not affect your cash flow statement directly since they have already been accounted for when issued. However, they still represent a future cash outflow when they will be cashed or deposited by the recipient.
What is the difference between an Outstanding Check and a Cleared Check?
An outstanding check is a check that has been written but not yet cashed or deposited, while a cleared check is a check that has been recognized by the bank and deducted from the account balance.
How long can a check be considered outstanding?
This largely depends on the banking policies, but a check is typically considered outstanding until it is cashed, deposited, or returned. If it’s not cashed within six months or so, it may become void.
Related Finance Terms
- Bank Reconciliation: The process of verifying the balance of a checkbook against the corresponding bank statement, which includes checks that have not yet cleared, i.e., outstanding checks.
- Cleared Check: A check that has been paid by the bank after it’s deposited or cashed. Distinguishable from an outstanding check, as the latter hasn’t been cleared yet.
- Uncollected Funds: The amount of deposited checks in a specific bank account that haven’t been processed yet. Outstanding checks are part of uncollected funds.
- Check Register: A document, usually part of the checkbook, where you list down all check transactions, including check number, amount, payees, and dates. It helps to identify any outstanding checks.
- Float Time: The period between when a check is written and when it is cleared from the account. The bank considers the check as outstanding during this time.
