What Is an Outstanding Check? Outstanding Checks 101

The only thing the payor can do, for a fee, is stop payment outstanding check meaning on the check. Besides the liability it creates, the payor may forget that they wrote the check and spend money allocated for the check. When the payee cashes the check, and their bank tries to pull funds from the payor’s account, the payor will get hit with an overdraft or non-sufficient funds (NSF) fee. The payor can void these fees using overdraft protection on their checking account. It is essential to understand the causes of outstanding checks, the consequences of not managing them, and the methods to identify and reconcile them. In summary, tracking outstanding checks is vital for businesses to maintain accurate financial records, manage cash flow effectively, and prevent discrepancies.

Financial Accounting

Outstanding checks are an important component of your financial records, as they directly impact your account balance. Failure to properly manage outstanding checks can result in overdrafts, inaccurate financial reporting, and potential fees or penalties. Overall, the consequences of not managing outstanding checks can be detrimental to the financial well-being of a business.

During the outstanding check bank reconciliation process, Sarah identified the check and adjusted her records accordingly. She debits the outstanding checks account and credits the cash account by $800 to reconcile her book balance with the actual bank balance. This adjustment ensures that her financial statements accurately reflect the funds available in her business account, considering the outstanding check. Void checks require careful documentation and accounting adjustments to maintain accurate financial records.

These instruments are among the oldest and most commonly used to pay for everything from raw materials and payroll to capital projects. Bank reconciliations and cash disbursement reports are part of the accounting system used to track outstanding checks, helping accountants and business owners monitor cash reserves. Unfortunately, outstanding checks can be a common problem and one of many complications for business owners.

• As a result, the payee could get charged their own overdraft fees if they were counting on that money and spent it.
• Learn about outstanding checks in finance, including the definition, risks involved, and effective ways to avoid them.
• Furthermore, if the payor’s account lacks sufficient funds, the check does not clear.
• Non-compliance can result in penalties, underscoring the importance of staying informed about state-specific obligations.

Communicate with the Payee

An outstanding check represents a check that hasn’t been cashed or deposited by the recipient or payee. One state is that the payee has the check but hasn’t deposited or cashed it. They must make sure that enough money remains in their checking account to cover the check until it is paid. The payee may cash the check immediately or might hold onto it for months.

• Once such checks are finally deposited, they can cause accounting problems.
• Of course, it’s best practice to deposit a check as soon as you receive it, which is why most checks include language encouraging a timely deposit.
• Anytime you make this request, mark it in your accounting software or ledger as “canceled.”  Doing so allows this money to be made available again.
• For issuers, poor management of these checks can lead to financial and legal consequences.
• The back of the check has an endorsement line for the payee’s signature when they are cashing or depositing the check.

In the U.S., outstanding checks are considered to be unclaimed property and the amounts must be turned over to the company’s respective state after several years. An outstanding check is a check that has been issued by the payer but has yet to be cashed or deposited by the payee. These checks help to reflect financial transactions in accounting records accurately. During the purchasing and accounts payable process, cash disbursements are often-times remitted using business checks.

Avoiding Outstanding Checks

However, till the expiry date of the check, it remains a liability to the check issuer. If the payee keeps any outstanding check for too long, then it runs the risk of getting void. Businesses must track outstanding items to avoid breaking unclaimed property laws. If payments to employees or vendors remain uncashed, they eventually must turn over those assets to the state. This typically occurs after a few years, but timetables vary from state to state. As businesses have to abide by the unclaimed property laws, any checks that have been outstanding for a long time must be remitted to the state as unclaimed property.

In U.S. accounting textbooks, every check that has not been cleared is termed an outstanding check. This is because the bank still needs to clear it on the payer’s end, as it is yet to be presented, and the status of its clearance remains uncertain. It may be necessary to issue a new check without getting the old check back if the original check was lost or destroyed. This presents a thorny situation—two checks might be circulating for a single payment.

What Are Some Best Practices for Managing and Clearing Outstanding Checks?

From there, you can confirm whether or not the check has been processed. Alternatively, you can contact your bank directly with the check number and ask them to confirm. Lastly, you can contact the recipient of the check and ask them to confirm whether they have deposited or cashed the check. After a check is issued, the recipient does not have to deposit or cash the check immediately. In fact, in most jurisdictions, an issued check will still be deposited by banks up to six months after the issue date.

Ask the payee to sign a document promising not to deposit both checks. If you’ve issued an outstanding check, you need to monitor your account. The money to cover the check must be available when your recipient deposits the check. However, it is ultimately up to the receiving bank whether they will cash (or deposit) a check or not.

Outstanding Checks Issued to You

Outstanding checks can result in bank overdrafts due to insufficient funds, not sufficient funds, or NSF which can result in fees. According to the unclaimed property laws, after a long while, outstanding checks must be remitted to the state as unclaimed property, also known as unclaimed assets. Checks that are outstanding for a long period of time are known as stale checks. Businesses that mishandle these kinds of situations are in violation of the law.

State-specific escheatment laws require businesses to report and remit unclaimed financial assets, such as uncashed checks, after a set dormancy period. While the Uniform Unclaimed Property Act provides a general framework, the specifics, such as dormancy periods, vary by state. Businesses must maintain an updated compliance calendar to avoid fines or penalties. Holding on to checks for a long time also increases the likelihood that they will get lost or destroyed before they are cashed or deposited. When preparing financial statements, one doesn’t directly add outstanding checks to the balance sheet. Instead, they consider it during the bank reconciliation process to ensure that the cash balance reported on the balance sheet is accurate.

In some jurisdictions, uncashed checks may be classified as unclaimed property, requiring compliance with escheatment laws. These laws mandate businesses to remit unclaimed funds to the state after a specified dormancy period. Non-compliance can result in penalties, underscoring the importance of staying informed about state-specific obligations. Additionally, the issuer must regularly contact the payee to inquire about the status of the check.