Outstanding Checks

Definition

Outstanding checks refer to checks that have been issued by a company or individual but have not yet been presented to the bank for payment. These unpresented checks are still considered liabilities on the company's or individual's bank reconciliation statement until they are cleared from the account.

5 Must Know Facts For Your Next Test

1. Outstanding checks are a common reconciling item in the bank reconciliation process, as they represent payments that have been made but not yet cleared the bank.
2. The existence of outstanding checks means that the company's or individual's book balance will be higher than the bank's reported balance, as the outstanding checks have not yet been deducted from the account.
3. Tracking and managing outstanding checks is important to ensure accurate cash flow management and to prevent potential overdraft fees or other issues related to uncleared payments.
4. Outstanding checks should be monitored and followed up on to ensure they are eventually cleared, as they represent a liability that needs to be resolved.
5. The bank reconciliation process is used to identify and account for outstanding checks, as well as other reconciling items, to ensure the accuracy of the company's or individual's financial records.

Review Questions

• Explain the purpose of a bank reconciliation and how outstanding checks fit into this process.
  • The purpose of a bank reconciliation is to compare a company's or individual's internal records of their bank account balance with the balance reported by the bank on their monthly statement. Outstanding checks are a key reconciling item in this process, as they represent payments that have been made but not yet cleared the bank. The existence of outstanding checks means that the company's or individual's book balance will be higher than the bank's reported balance, as the outstanding checks have not yet been deducted from the account. Tracking and managing outstanding checks is important to ensure accurate cash flow management and to prevent potential overdraft fees or other issues related to uncleared payments.
• Describe how outstanding checks are accounted for in the preparation of a bank reconciliation statement.
  • When preparing a bank reconciliation statement, outstanding checks are listed as a reconciling item that increases the book balance to match the bank's reported balance. The book balance is adjusted upward by the total amount of outstanding checks, as these payments have been recorded in the company's or individual's internal records but have not yet been deducted from the bank account. This reconciling item is necessary to ensure that the book balance accurately reflects the true amount of funds available in the account, taking into account payments that have been made but not yet cleared by the bank.
• Analyze the potential implications of not properly accounting for outstanding checks in the bank reconciliation process and the associated journal entries.
  • Failing to properly account for outstanding checks in the bank reconciliation process and associated journal entries can have significant implications for a company's or individual's financial records and cash management. If outstanding checks are not properly identified and reconciled, the book balance will not accurately reflect the true amount of funds available in the account, which could lead to issues such as overdraft fees, bounced checks, or inaccurate reporting of cash balances. Additionally, not recording the journal entries to account for outstanding checks can result in discrepancies between the company's or individual's internal records and the bank's reported balance, potentially leading to errors in financial reporting and decision-making. Proper management and accounting for outstanding checks is crucial to maintaining the integrity of the bank reconciliation process and ensuring the accuracy of a company's or individual's financial records.

Related terms

Bank Reconciliation: A bank reconciliation is the process of comparing a company's or individual's internal records of their bank account balance with the balance reported by the bank on their monthly statement.

Cleared Checks: Cleared checks are those that have been presented to the bank and deducted from the account holder's balance.

Book Balance: The book balance is the balance of a company's or individual's internal records, which may differ from the bank's reported balance due to outstanding checks and other reconciling items.