Outstanding Check

DEFINITION of 'Outstanding Check'

An outstanding check is a financial instrument that has not yet been cashed or deposited by the payee – that is, the person or institution to whom it was 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 – that is, the person who wrote it. 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 that authorizes a bank to transfer funds from the payor’s account to the payee’s account. A payor (also called a drawer) 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 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.

Sometimes, however, the payee may not deposit the check right away. When this happens the check is referred to as an outstanding check. Such 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. This means that the payor’s account balance will be inflated, presenting the false notion that there is more money in the account available to be spent than there actually is. 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.

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. This 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 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. 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.