During the purchasing and accounts payable process, cash disbursements are often-times remitted using business checks. 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.
Definition Of An Outstanding Check
Although direct deposit, online bill payment, wires and electronic fund transfers are popular payment types, paper checks are still a viable option. When a check is created and disbursed, it becomes outstanding until it is drawn at the bank. When a vendor or employee goes to the bank to cash the check, and it’s cleared the bank, the check will show up on the bank statement. A credit on the statement will show the disbursement, and a copy of the check will likely be listed at the bottom of the account’s statement. There is always or should be a paper trail behind every balanced checkbook.
How To Record An Outstanding Check
Most general ledger systems have an automated recordation process of checks that occurs when paying bills. The accounts payable module allows for bill payment, by selection of a pay bill feature. Selecting a check payment automatically reduces the liability in the general ledger and posts a credit to the cash account. The bank reconciliation module registers an outstanding check that cannot be cleared until the money is drawn from the bank account.
How To Find Outstanding Checks
The outstanding check will become a reconciling item in the bank reconciliation process, outstanding checks should be displayed as a “list” or “timing” item, depending on the reconciliation system used. This simply means that the check has been recorded in the general ledger as a cash disbursement, but the money has not been disbursed from the bank account by the bank statement date. This is when the check has not been cashed or deposited into the payee’s bank. At that point, the payer may need to issue a replacement payment or new check to replace the old check which hopefully will end up in the payee’s account. Finding all outstanding checks should be as simple as reviewing the reconciliation. While preparing the reconciliation, which should be done at the end of the month, a comparison of general ledger details and bank details will reveal outstanding checks and the differences between the ledger balance and bank balance.
Checks are often used to pay for inventory, operational expenses and payroll, but the money isn’t disbursed from the business bank account until the check is drawn. Tracking outstanding checks is important for maintaining working capital for on-going operations. Bank reconciliations are an ideal place to track outstanding checks.
There are several issues that can arise from outstanding checks. When a check is outstanding, the company’s bank account will have an inflated account balance. 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.