An outstanding check is a check written by the issuer and registered in his account but which the recipient has not yet cashed or deposited.
A bounced check can result in bank fees, legal penalties, and damage your credit score.
If a check stays outstanding for too long, it may become stale, meaning the bank may not honor it, usually after six months.
Outstanding checks are deducted from the bank balance during settlement to reflect the true amount of funds available in your account.
Definition of an outstanding check
So, let's discuss all the details. An outstanding check refers to a check that someone wrote and issued from their checking account, ensuring that there are sufficient funds to cover it, but the recipient has not yet cashed the check or deposited it into their bank account.
Over time, if the recipient fails to cash or deposit the check, it may become an old check.
Old checks are those that have not been cashed within a certain period, usually six months, after which banks may not honor them without a stop payment or reissue order.
What do you do with outstanding checks? To manage outstanding checks, an issuer needs to regularly monitor their bank accounts to ensure that all checks are accounted for and that there are always sufficient funds available to cover the checks when they are eventually cashed.
If a check remains outstanding for too long, the issuer may choose to stop payment on the check to prevent it from being cashed after it becomes stale, thus protecting the funds in his or her checking account.
The process involves contacting the bank to officially stop paying the outstanding check and possibly issuing a new check if necessary.
What causes outstanding checks?
There may be several different reasons why you may have a check payable:
Simply put, the beneficiary has not yet deposited the check for personal reasons.
The beneficiary may forget or even lose the check received from you.
Sometimes, checks do not reach the payee and are lost in the mail or returned if the address is incorrect.
Risks and benefits
Outstanding checks aren't always a problem, but they can pose risks. If someone writes a check and spends the money before the check cashes, they may overdraft their account.
There is also a risk of fraud if a check is lost or stolen before it is deposited, as someone could change the payee's name or amount.
Furthermore, these checks can cause accounting problems, making it difficult to maintain accurate financial records and can complicate audits or financial reconciliations.
They can also make cash flow management difficult because it's unclear how much money is really available if many checks go uncashed.
However, there are benefits to outstanding checks. They allow payments without the need for immediate cash, provide a way to track payments, and provide a paper trail of transactions.
They can also delay payments, which may help better manage cash flow by keeping money in the account longer to earn more interest.
Outstanding business checks
When a company issues a check, it records the amount in its general ledger, but if the check is not cashed, the bank balance will appear higher than it appears in the ledger.
To maintain accurate financial statements, businesses need to adjust their bank statement balance.
Businesses must also follow unclaimed property laws, which means uncashed checks must eventually be turned over to the state.
It is important for businesses to promptly communicate with payees about checks issued, especially given potential postal delays.
Ensuring that beneficiaries have the correct contact information is vital to avoid losing checks. Maintaining a detailed record of all communications regarding outstanding checks is important to resolve any issues with uncashed checks, including reconciling payments with invoice data to catch any lost or incorrectly applied checks.
How to avoid using outstanding checks?
Closely track checks issued.
Confirm receipt with beneficiaries.
Use electronic payments when possible.
How do I reconcile outstanding checks and my bank statement?
List all checks issued that do not appear as cleared on your bank statement.
Subtract the total amount of outstanding checks from the ending balance on your bank statement to adjust your book balance.
Verify that all transactions between your records and bank statement match, and adjust any discrepancies.
To settle a check, contact the payee to encourage them to cash it, or if a long time has passed, stop payment and reissue a new check.
