During the purchasing and accounts payable process, cash disbursements are often-times remitted using business checks. These instruments are among the oldest and most commonly used to pay for everything from raw materials and payroll to capital projects. Bank reconciliations and cash disbursement reports are the tools used to track outstanding checks, helping accountants and business owners monitor cash reserves.
Definition of an Outstanding Check
Although direct deposit, wires and electronic fund transfers are popular payment types, paper checks are still a viable option. When a check is created and disbursed, it becomes outstanding until it is drawn at the bank. When a vendor or employee goes to the bank to cash the check, and it’s cleared the bank, the check will show up on the bank statement. A credit on the statement will show the disbursement, and a copy of the check will likely be listed at the bottom of the bank statement.
How to Record an Outstanding Check
Most general ledger systems have an automated recordation process of checks that occurs when paying bills. The accounts payable module allows for bill payment, by selection of a pay bill feature. Selecting a check payment automatically reduces the liability in the general ledger and posts a credit to the cash account. The bank reconciliation module registers an outstanding check that cannot be cleared, until the money is drawn from the bank account.
How to Find Outstanding Checks
When reviewing a bank reconciliation, outstanding checks should be displayed as a “list” or “timing” item, depending on the reconciliation system used. This simply means that the check has been recorded in the general ledger as a cash disbursement, but the money has not been disbursed from the bank account. Finding all outstanding checks should be as simple as reviewing the reconciliation. While preparing the reconciliation, a comparison of general ledger details and bank details will reveal outstanding checks and the differences between the ledger balance and bank balance.
Checks are often used to pay for inventory, operational expenses and payroll, but the money isn’t disbursed from the business bank account until the check is drawn. Tracking outstanding checks is important for maintaining working capital for on-going operations. Bank reconciliations are an ideal place to track outstanding checks.