What is an outstanding check and why is it included in preparing a bank reconciliation?

You can also use bank statement reconciliation to track your business’s progress. Using your outstanding deposits to balance the accounts, you can measure profitability and project cash flow. The payor must be sure to keep enough money in the account to cover the amount of the outstanding check until it is cashed, which could take weeks or sometimes even months. Companies may authorize a bank to automatically outstanding checks transfer funds into or out of their account. Automatic withdrawals from the account are used to pay for loans (notes or mortgages payable), monthly utility bills, or other liabilities. Automatic deposits occur when the company’s checking account receives automatic fund transfers from customers or other sources or when the bank collects notes receivable payments on behalf of the company.

The payor can void these fees using overdraft protection on their checking account. A credit memorandum attached to the Vector Management Group’s bank statement describes the bank’s collection of a $1,500 note receivable along with $90 in interest. The bank deducted $25 for this service, so the automatic deposit was for $1,565. The bank statement also includes a debit memorandum describing a $253 automatic withdrawal for a utility payment. On the bank reconciliation, add unrecorded automatic deposits to the company’s book balance, and subtract unrecorded automatic withdrawals. Therefore, each transaction on the bank statement should be double‐checked.

Accounting Principles I

Through the use of the check, the sender and the recipient of the payment are able to retain a record of the transaction, which includes the date, the amount, and the payee. In this context, an outstanding check need not be outstanding for long; it may simply be the short period of time between when a check is mailed and when it is received. Individuals need to account for outstanding checks when they balance their checkbooks. When you write a personal check, you should record the date, check number, payee, and amount in your check register.

• Individuals need to account for outstanding checks when they balance their checkbooks.
• This error is a reconciling item because the company’s general ledger cash account is overstated by $63.
• Some checks become stale if dated after 60 or 90 days, while others become void after six months.
• If a check is never deposited or if gets destroyed, the money remains in the check-writer’s account.
• Furthermore, checks that are never cashed may constitute “unclaimed property” that is turned over to the state.
• Since the company mailed the check, they would have credited cash, but the bank would not process the check until the customer deposits the check.

My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. If you want to learn more about how to handle ripped or damaged checks, you can check out our online resource that can provide helpful information and guidance. Make sure that payees have access to the right contact information so that they can get in touch with you or your designated representative regarding any questions, issues, or changes relating to the overdue check. Check to see that the contact information is correct, as checks may go missing simply because of an incorrect mailing address. The G/L period ending date for the selected period automatically displays
in the screen header and cannot be edited.

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This could result in a “bounced check”, and you may be charged a “non-sufficient funds” (NSF) fee by your bank. It may also damage your relationship with the vendor or person you gave the check to. When all differences between the ending bank statement balance and book balance have been identified and entered on the bank reconciliation, the adjusted bank balance and adjusted book balance are identical. Since the NSF check has previously been recorded as a cash receipt, a journal entry is necessary to update the company’s books. Therefore, a $345 debit is made to increase the accounts receivable balance of Hosta, Inc., and a $345 credit is made to decrease cash. The interest revenue must be journalized and posted to the general ledger cash account.

The Vector Management Group’s bank statement includes an NSF check for $345 from Hosta, Inc. Banks often require customers to pay monthly account fees, check printing fees, safe‐deposit box rental fees, and other fees. Unrecorded service charges must be subtracted from the company’s book balance on the bank reconciliation. The Vector Management Group’s bank statement on page 120 includes a $20 service charge for check printing and a $50 service charge for the rental of a safe‐deposit box.

Communicating Outstanding Checks to Payee

It’s fine to contact the recipient after a few weeks to find out if they’ve lost the check or when they plan on cashing it. If they can’t get to the bank, you may want to ask them to return the check to you and you can pay them using another method. Balancing your checkbook is akin to what professional accountants do during reconciliation. It’s a way of making sure that you and your bank agree about your account balance and available funds. It can be tricky to balance a checkbook and we have a worksheet with step-by-step instructions to help you.

Outstanding checks are checks that have been issued but not yet presented for payment or cleared by the bank. They represent pending transactions where the funds have not yet been deducted from the issuer’s account. These checks can pose risks such as overdrawing the account, potential fraud, accounting discrepancies, and delayed financial reporting. Checks that remain outstanding for long periods of time cannot be cashed as they become void.