Outstanding Check Definition - AccountingTools

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What is an Outstanding Check?

An outstanding check is a check payment that has been recorded by the issuing entity, but which has not yet cleared its bank account as a deduction from its cash balance. The concept is used in the derivation of the month-end bank reconciliation.

There is typically a multi-day period between when a check is created and when it is presented for payment, which is caused by the time required for the postal service to deliver the check, as well as for the payee to deposit it. The check may also be delayed if the issuing entity puts off mailing the check for any reason.

If an outstanding check has not yet cleared the bank by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item in the month-end bank reconciliation prepared by the issuing entity.

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Accounting for an Outstanding Check

An outstanding check remains a liability of the payer until such time as the payee presents the check for payment, which then eliminates the liability. If the payee never presents the check for payment, the payer can mark the check as void in its accounting system, which usually marks the original account payable as unpaid, and also increases the balance in the cash account by the amount of the outstanding check that is now being voided.

Problems with Outstanding Checks

Outstanding checks can cause a variety of financial and operational issues, especially if not managed properly. Here are the main problems associated with them:

• Account reconciliation issues. Outstanding checks make it harder to reconcile bank statements because the balance in your checkbook or accounting records doesn't match the bank's reported balance until the checks clear.

• Overdraft risk. If an outstanding check is forgotten and another payment reduces the account balance below the amount of the check, it can result in an overdraft when the check is eventually cashed.

• Stale or void checks. Checks that remain outstanding for too long can become stale (usually after six months) and may no longer be accepted by the bank or the recipient. This can lead to confusion or the need to reissue the payment.

• Unclaimed property or escheatment. In some jurisdictions, if checks remain uncashed for a long time, the amount may need to be turned over to the state as unclaimed property, requiring additional administrative work and compliance measures.

• Cash flow mismanagement. Outstanding checks can give a false sense of available funds, leading to poor cash flow management and financial decisions.

• Negative impact on relationships. If a recipient does not cash a check promptly, it may create misunderstandings or damage trust. The recipient may assume the payment was not made or accuse you of financial negligence.

• Administrative burden. Tracking and following up on outstanding checks requires time and effort, especially for businesses with numerous transactions.

• Audit and tax complications. For businesses, outstanding checks that are not properly accounted for can create discrepancies during audits or tax filings, leading to penalties or additional scrutiny.

FAQs

How Long Can a Check Remain Outstanding?

A check can typically remain outstanding for up to six months, which is the standard validity period set by most banks. After that, banks are not legally required to honor the check, though some may still process it at their discretion. To avoid complications, businesses often place stop-payment orders on stale checks and reissue new ones if needed.

Terms Similar to Outstanding Check

An outstanding check is also known as an outstanding cheque.

Related Articles

Returned Check

Uncleared Check

Undeposited Checks

Unpresented Check

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