An outstanding check is a check that a check writer has issued and recorded in their accounting system, but which has not yet been deposited or cashed by the recipient or cleared by the bank.
For instance, if a business writes a check to a supplier but the supplier doesn’t deposit the check immediately, this check is considered outstanding. The issuer has accounted for the reduction in their bank account balance, but the actual decrease will not occur until the recipient cashes the check and the bank clears it.
Outstanding checks are important in the reconciliation of a company’s bank statement. When a company receives its bank statement, the balance may not match the company’s records due to checks that have not yet cleared. By accounting for outstanding checks, the company can accurately reconcile its book balance with the bank statement balance.
Example of an Outstanding Check
Let’s consider a scenario involving a small business, called BestBooks Store.
On July 25, 2023, BestBooks Store issues a check for $500 to one of its suppliers, PaperMills Co., for a new shipment of books. BestBooks Store records the check in its accounting system on the same day, reducing its cash balance by $500.
However, PaperMills Co. does not deposit the check immediately. Instead, it deposits the check on August 2, 2023. From July 25 to August 1, the $500 check is considered an “outstanding check” from the perspective of BestBooks Store.
On July 31, 2023, BestBooks Store receives its bank statement, which shows a balance that is $500 higher than its own records, since the $500 check has not yet cleared. When BestBooks Store reconciles its bank statement, it must account for this outstanding check to make its books align with the bank statement.
Once the check is deposited by PaperMills Co. and cleared by the bank on August 2, 2023, it is no longer considered outstanding. The bank statement balance and the company’s book balance will now align, assuming there are no other discrepancies.