Definition
An outstanding check is a check issued by an account holder but not yet cleared or cashed by the recipient. These checks have not yet been deducted from the account holder’s bank balance, resulting in a misleading higher available balance. This can pose significant implications for cash flow management and financial reporting.
Examples
- Payroll Check: A company issues payroll checks, but some employees have not deposited or cashed their checks.
- Vendor Payment: A business writes a check to a supplier, but there is a delay in the supplier cashing it.
- Personal Check: An individual writes a check for a service but the recipient delays cashing it.
Frequently Asked Questions
What happens if an outstanding check is never cashed?
If a check is never cashed, the funds remain in the account indefinitely or until other issues such as escheatment laws, which require dormant funds to be turned over to the state, come into play.
How long can a check remain outstanding?
The duration varies; typically, personal checks are valid for six months, but this can depend on banks’ policies and state laws.
Can an outstanding check be canceled?
Yes, a check typically can be canceled if it hasn’t been cashed. This is achieved through issuing a stop payment order through the bank.
How do outstanding checks affect bank reconciliation?
Outstanding checks need to be subtracted from the bank statement balance during the bank reconciliation process to adjust for the actual available balance correctly.
What are the risks of having many outstanding checks?
Potential risks include disbursement fraud, elevated bookkeeping errors, and distorted financial statement representation. Additionally, the business might overdraw its account, leading to insufficient funds (NSF) fees.
- Void Check: A check that has been rendered invalid and non-negotiable.
- Cancelled Check: A check that the bank has paid and subtracted from the issuer’s account.
- Unpresented Check: Synonymous with an outstanding check; a check that has been written and recorded but not yet presented for payment.
- Stop Payment Order: A request to cancel a check that has not yet been processed.
Online References
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Principles of Accounting Volume 1 - Financial Accounting” by Mitchell Franklin, Patty Graybeal, and Dixon Cooper
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, C. William (Bill) Thomas, and Wendy M. Tietz
Fundamentals of Outstanding Checks: Financial Accounting Basics Quiz
### What is an outstanding check?
- [ ] A check that has been canceled by the issuer.
- [x] A check that has been written but not yet cashed or deposited.
- [ ] A check that has been returned for insufficient funds.
- [ ] A check that has been recorded by the bank but not by the issuer.
> **Explanation:** An outstanding check is one that has been written but not yet cashed or deposited by the recipient.
### What is the main impact of outstanding checks on financial statements?
- [ ] They inflate cash balances.
- [ ] They remove liabilities.
- [x] They cause discrepancies during bank reconciliation.
- [ ] They reduce the overall net worth.
> **Explanation:** Outstanding checks cause discrepancies during bank reconciliation as the issued check hasn't yet been cleared, leading to misalignment between the cash book and bank statements.
### What action might a bank account holder take with an unchecked outstanding check?
- [ ] Withdraw the equivalent sum.
- [ ] Ignore the outstanding check.
- [ ] Cancel the bank account.
- [x] Issue a stop payment order.
> **Explanation:** A stop payment order can be issued to cancel a check that hasn't yet been processed by the recipient.
### How does an outstanding check affect a company's cash balance?
- [ ] It increases the actual cash balance.
- [ ] It has no effect on cash balance.
- [x] It makes the available balance appear higher than it actually is.
- [ ] It reduces actual cash balance immediately.
> **Explanation:** The available cash balance appears higher than it actually is because the check amount hasn’t been debited yet.
### For how long is a typical personal check valid?
- [ ] 3 months
- [ ] Indefinitely
- [x] 6 months
- [ ] 1 year
> **Explanation:** Typically, a personal check is valid for six months unless specific conditions dictate otherwise.
### When reconciling a bank statement, where should outstanding checks be listed?
- [ ] Additions to the bank balance
- [ ] Additions to cash on hand
- [ ] Subtractions from book balance
- [x] Subtractions from the bank balance
> **Explanation:** During reconciliation, outstanding checks should be subtracted from the bank statement balance to adjust for the checks that haven't been cleared.
### What might be a consequence of having numerous outstanding checks?
- [x] Potential overdrawn account
- [ ] Increased loan amounts
- [ ] Increased interest earned
- [ ] Enhanced credit scores
> **Explanation:** Multiple outstanding checks can lead to potential overdrawn accounts and NSF fees due to the discrepancy between the actual available balance and the stated balance.
### What is another term often used synonymously with an outstanding check?
- [x] Unpresented check
- [ ] Paid check
- [ ] Canceled check
- [ ] Retained check
> **Explanation:** An unpresented check is another term used for a check that has been issued but not yet cashed by the recipient.
### In a bank reconciliation statement, outstanding checks are:
- [x] Deducted from the bank's ending balance.
- [ ] Added to the bank's ending balance.
- [ ] Ignored completely.
- [ ] Considered as revenues.
> **Explanation:** Outstanding checks are deducted from the bank's ending balance in the reconciliation process.
### What type of expense might properly managing outstanding checks help to avoid?
- [ ] Marketing expenses
- [x] Bank fees from overdrafts
- [ ] Rent expenses
- [ ] Tax expenses
> **Explanation:** Proper management of outstanding checks helps to avoid bank fees from overdrafts by ensuring accurate tracking of available funds.
Thank you for studying our thorough explanation and quiz on outstanding checks. Continue enhancing your understanding of financial accounting principles for a successful career!
