Outstanding Check

DEFINITION of 'Outstanding Check'

An outstanding check is a check which has not yet been cashed or deposited by the payee. An outstanding check also refers to a check which has been presented to the bank but is still in the bank's check clearing cycle.

An outstanding check represents a liability for the payor. 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 even months.

Checks that are outstanding for a long period of time are known as stale checks.

BREAKING DOWN 'Outstanding Check'

One of the ways of making payment for a transaction is by check. A check is a financial instrument which authorizes a bank to transfer funds from the payor’s account to the payee’s account. A payor is the party that writes the check, and the payee is the entity that receives the check as payment for goods/services or a cash gift. Either party could be an individual or a business. When the payee presents the check to his bank, the bank requests the funds from the payor’s bank which, in turn, withdraws the amount from the payor’s account and transfers the check amount to the payee’s bank. When the bank receives the full amount requested, it deposits it into the payee’s account.

However, sometimes, even though the check has been written and given to the payee, the payee may not deposit the check right away. When this happens, the check is referred to as an outstanding check. Outstanding checks present a number of issues for the individuals or companies that write them. A payor will still have the amount of funds in his account if the check has not been cashed or cleared by a bank. In this case, the payor’s account balance will be inflated, presenting a false notion that the individual has more money to spend than he actually has. If the payor spends the money, and the check is later cleared, this could put his account in the red if he did not leave enough funds in his account to clear the check. When this happens, he will be charged an overdraft or non-sufficient funds (NSF) fee by the bank, unless he has overdraft protection set up.

Forgotten outstanding checks are a common source of bank overdrafts. One way to avoid this occurrence is to maintain a balanced checkbook. With banking activity becoming increasingly electronic, another way to avoid writing a check and forgetting about it is to use the checking account's online bill pay service, which should provide real-time information about the total dollar amount of checks outstanding and the total dollar balance presently in the account.

When a business writes a check, it deducts the amount from the appropriate general ledger cash account. If the funds have not been withdrawn or cashed by the payee, the company’s bank account will be overstated and will have a larger balance than the general ledger entry. To reconcile the bank statement so that the company’s cash account in its financial statements is consistent with the cash in its bank account, the company must adjust its 'balance per bank', which refers to the ending cash balance on a bank statement. Since businesses have to abide by the unclaimed property laws, any checks that have been outstanding for a long time must be remitted to the state as unclaimed property.