What is an outstanding check

In a bank reconciliation, an outstanding check is the check that has been recorded in the company’s book but yet to be determined to be cleared by the bank. Basically, the cash balance got reduced, but the bank is not subtracted any amount from the account balance of the account holder. This disparity happens due to the gap in time between when the check is processed and when the recipient transfers it. Throughout this period, the check stays outstanding.

How an Outstanding Check Works

The time period between the check issue and clearance is regarded as outstanding. This time period can be in between a few days and a number of weeks, or it can take months, and this delaying can be because of several reasons, i.e., the delivery time of the mail, the payee’s responses, and the effectiveness of the banking system.

Outstanding check consist of the following stages: –

Issuance: The payer writes the check and dates it, and also the payer is the one who records transactions in the accounting system and checkbook register.

Delivery to the payee: The mode of delivery for the check to the payee may be physical or electronic.

Payee’s decision: It depends upon the payee’s decision when to cash the check, and these decisions can be affected for various reasons like requirement of funds, ease, or reliance on the payor.

The payee must be worried about the insufficient funds in the payer’s account. The payer may possess a reputation for distributing checks that are likely to bounce or possibly that they could issue stop payment instructions to the bank not to execute the check.

Deposit or cashing: To deposit or cash the check, the payee brings it to their bank. The total amount is credited to the payee’s bank account at the time of check deposit. They will immediately get the money if they want to cash it.

Bank processing: Depending on the location and kind of check, the clearing system might involve several banks and clearinghouses before the payee’s bank delivers the check.

Verification and funds transfer: The payor’s bank authorize the money transfer, confirms the check’s legitimacy, and makes sure there are enough funds in the payor’s account.

Clearing and posting: The check is recognized as cleared or paid once the money has been moved from the payor’s account to the payee’s account.

Reconciliation: The payor can verify the payment and reconcile their records when the cleared check appears up on their bank statement. The cheques and the bank statement are sent back by some banks.

How to Minimize Outstanding Checks

Below are the tips that help to reduce the volume of outstanding cheques in bank reconciliation and decrease the related risks and discomfort.

For the Issuer

Decreasing the reconciling items can accelerate the bank reconciliation process for the cheque issuer. Below are some ways that will help to reduce the outstanding checks:

Opt for electronic payment methods. Electronic payment methods will reduce the processing time period and also decrease the risk of cheques being lost or deferred.

Mail checks promptly to avoid delivery delays. To avoid the delay in delivery for the check, it is important to mail it immediately. The receivers knowing when the check will arrive inspires them to deposit them immediately. This results in a decrease in the time of outstanding checks.

Perform bank reconciliations. To prevent outstanding checks and ensure the accuracy of the records, it is advised to reconcile the bank accounts on a frequent basis.

Use Positive Pay services. Some banks provide Positive Pay Services, which enable you to deliver them the list of issued checks. The bank then only clears those checks that align with the list that you provided, which leads to less risk of fraud.

For the Payee

Below are some points that will help the payee to decrease the number of outstanding cheques:

Deposit checks immediately. Depositing the cheques immediately leads to a decrease in the delays as well as possible concerns like stale-dating (the checks that are at least more than 180 days) or loss.

Use mobile deposit. You may deposit checks using your smartphone thanks to the mobile deposit services offered by several banks. For speedy deposits, this is a practical choice.

Set up direct deposit. Request that the payor set up direct deposit to your bank account if you get paid on a regular basis. This completely removes the necessity for checks.

Questions to Understand your ability

Que.1 What’s an outstanding check, really?

A. A check that’s already cleared by the bank

B. A check recorded in the company’s books but still not cleared by the bank

C. A check that’s deposited but hasn’t hit the company’s books

D. A check that goes straight into the payee’s account without delay

Que.2 Why does an outstanding check take forever to clear?

A. It’s stuck in mail delivery

B. The payee’s just holding onto it

C. The banking system is slow

D. All of the above

Que.3 How can the issuer avoid having too many outstanding checks?

A. Just stop writing checks

B. Delay mailing checks as long as possible

C. Go digital with electronic payments

D. Ask the payee to wait before cashing it

Que.4 What’s the deal with Positive Pay services?

A. It speeds up check clearance

B. It only lets checks that match an approved list clear, cutting down fraud

C. It tracks every mailed check’s location

D. It alerts payees when a check is issued

Que.5 What can the payee do to keep checks from going stale?

A. Cash or deposit checks right away

B. Use mobile deposit to avoid delays

C. Set up direct deposit with the payor

D. All of the above

Conclusion

In short, outstanding checks can mess up bank reconciliations, but there are ways to cut them down. Issuers and payees just need to be proactive. Use electronic payments, deposit checks fast, reconcile accounts often, and try services like Positive Pay. These steps reduce delays, lower risks, and keep records tight.