What is a Canceled Check
A canceled check is a check that has cleared the depositor's account and has been marked "canceled" by the bank. A canceled check has been paid by the drawee bank and endorsed by the payee, the payee's bank and the Federal Reserve Bank. Canceled checks can also be used as proof of payment.
BREAKING DOWN Canceled Check
Traditionally, canceled checks were returned to account holders with their monthly statements. That is now rare, and most check writers receive scanned copies of their canceled checks, while the banks create digital copies for safekeeping. By law, financial institutions must keep canceled checks or the capacity to make copies of them for seven years. In most cases, customers who utilize online banking can also access copies of their canceled checks via the web. While many banks charge for paper copies of canceled checks, customers can typically print copies from the bank's website for free.
How Canceled Checks Work
A canceled check is the last step in the traditional check cashing process. To illustrate, say Jan writes a check to Bob. Bob takes the check to his bank and deposits it. The bank credits Bob's account in the amount of the check. In some cases, the credit takes place automatically, and in other cases, there is a delay on all or a portion of the funds until the check clears. Bob's bank sends the check to Jan's bank. Jan's bank debits Jan's account for the amount of the check, and it stamps the check as canceled.
As of 2006, 57% of banks were still using the traditional process of cashing and depositing checks, but by 2016, nearly 100% of banks had shifted to an electronic process. The concept is the same, but the paper check almost never leaves the facility where it is deposited. Rather, a special scanner creates a digital impression of the front and back of the check, which it sends to the other bank. When the check finally clears the account of the person who wrote it, it is considered canceled. Essentially, canceled means the process is done, and the check cannot be reused.
Difference Between a Canceled Check and a Returned Check
While a canceled check is honored by the bank, a returned check is not honored. If someone writes a check and there is not enough money in his account to cover it, the bank may decide to return it. This means the bank sends it back to the account into which it was deposited.
Continuing with the previous example, if Jan does not have enough money in her account to cover the check she wrote to Bob, Jan's bank can return the check. At that point, Jan's account is not debited, but she may incur an insufficient funds fee. When Bob's bank receives the check, it debits Bob's account the amount it previously credited. Then it either tries to resubmit the check to Jan's bank, or it sends an electronic copy of the returned check back to Bob.