Outstanding Check: Definition, Risks, and Ways To Avoid

What Is an Outstanding Check?

An outstanding check is a check payment that is written by someone but has not been cashed or deposited by the payee. The payor is the entity who writes the check, while the payee is the person or institution to whom it is written. An outstanding check also refers to a check that 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 sometimes even months.

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

How Outstanding Checks Work

One of the ways of making payment for a transaction is by check. A check is a financial instrument that authorizes a bank to transfer funds from the payor’s account to the payee’s account. When the payee deposits the check at a bank, it requests the funds from the payor’s bank, which, in turn, withdraws the amount from the payor’s account and transfers it to the payee’s bank. When the bank receives the full amount requested, it deposits it into the payee’s account.

A check becomes outstanding when the payee doesn't cash or deposit the check. This means it doesn't clear the payor's bank account and doesn't appear on the statement at the end of the month. Since the check is outstanding, this means it is still a liability for the payor. Once the payee deposits the check, it is reconciled against the payor's records.

Checks that remain outstanding for long periods of time cannot be cashed as they become void. Some checks become stale if dated after 60 or 90 days, while others become void after six months.

Risks and Outstanding Checks

If the payee doesn't deposit the check right away, it becomes an outstanding check. This means the balance remains in the payor's account. If the payor doesn't keep track of his account, he may not realize the check hasn't been cashed. This may present the false notion that there is more money in the account available to be spent than there should be. If the payor spends some or all of the money that should have been held in reserve to cover the check and then said check is later cleared, the account ends up in the red. When this happens, the payor will be charged an overdraft or non-sufficient funds (NSF) fee by the bank, unless the account has overdraft protection.

How to Avoid Outstanding Checks

Forgotten outstanding checks are a common source of bank overdrafts. One way to avoid this occurrence is to maintain a balanced checkbook. This can help prevent any unnecessary NSFs if the payee decides to cash the check at a later date.

You can also call or write to remind the payee that the check is outstanding. This may encourage them to deposit or cash the check. If they haven't received the payment, this may nudge them to notify you to reissue the check.

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. This should provide real-time information about the total dollar amount of checks outstanding and the total dollar balance present in the account.

Outstanding Business Checks

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 have a larger balance than the general ledger entry. To reconcile the bank statement so 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.

As 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.