OUTSTANDING CHECKS: How To Calculate Outstanding Checks With Examples

outstanding checks definition bank recongnition calculations examples
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Drawing of funds in an individual’s or business’s bank account without a proper calculation of the account balance at the end can lead to having outstanding checks. How do you deal with it? This article answers every question you pay possibly have about what outstanding checks are, the definitions, bank reconciliation, how to calculate them, and examples. Now, let’s understand the meaning of the term outstanding terms.

Meaning Of Outstanding Checks

When someone receives a check, they have to take it to their bank or credit union to collect the payment. This check is a payment form of checks, that has been written and issued but has yet to clear the bank account from which it was drawn. In other words, an outstanding check is one that awaits the depositor to cash it out, so that the checks will be cleared. Once the checks have not been withdrawn the checks are still outstanding checks.

What Are Outstanding Checks?

It refers to those checks that have been recorded by a company as being written, but not yet cleared and posted to the account’s statement by the company’s bank.  Outstanding checks are thus typically identified as part of the bank account reconciliation process. An outstanding check is a check that is written by a company to be withdrawn by the person the check is addressed to but is yet to be cleared from the company’s bank account; due to the delay in cashing out the check.

An outstanding check is a check that a company has issued and recorded in its general ledger accounts, but the checks have not yet cleared the bank account on which it is drawn. Moreover, an outstanding check is one that was already written but not cashed before the end of a month period. In other words, it is still out there waiting to be cashed and drawn out of your checking account. These generally do not appear on the monthly bank statement because they haven’t been paid from the account as of the statement date.

Outstanding Checks,definitions, bank reconciliation, calculation,examples
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Outstanding Checks Bank Reconciliation

A bank reconciliation is a process of matching the balances in an entity’s accounting records for a cash account to the corresponding information on a bank statement. This process is also to ascertain the differences between the two and to book changes to the accounting bill records as appropriate. Bank reconciliations are completed at regular intervals to ensure that the company’s cash records are correct. They also help detect fraud and any cash manipulations.

You receive a bank statement, typically at the end of each month, from the bank. The statement lists the cash and other deposits made into the checking account of the business. The statement also includes bank charges such as account servicing fees.

Once you’ve received it, follow these steps to reconcile a bank statement:

#1. Comparing Deposits

Once the deposits in the business records is matching with those in the bank statement, there is uniform account detail. However, you need to compare the amount of each deposit recorded in the debit side of the bank column of the cashbook with the credit side of the bank statements and the credit side of the bank column with the debit side of the bank statement. Then identify the items that show changes on both the records.

#2. Adjusting Bank Statement

Adjust the balance on the bank statements to the corrected balance. By doing this, however, you must add deposits in transit, remove outstanding checks and add/deduct bank errors.

Deposits in transit are amounts that are received and recorded by the business but are not yet recorded by the bank. They must be added to the bank statement. Bank errors are mistakes done by the bank in calculating your account details or balance. Outstanding checks are those that have been written and recorded in the cash account of the business but have not yet cleared the bank account.

Thus, it is good to compare the cash account’s general ledger to the bank statement to spot the errors.

#3. Adjusting The Cash Account

Adjusting the cash balances in the business account is by adding interest or deducting monthly charges and overdraft fees. 

To do this, businesses need to take into account the bank charges, NSF checks, and errors in accounting.

  1. Bank charges are thus service charges and fees deducted for the bank’s processing of the business’ checking account activity. This can also include monthly charges or charges from overdrawing your account. They must be deducted from your cash account. If you have earned any interest on your bank account balance, it must be added to the cash account.
  2. An NSF (not sufficient funds) check is a one that has not been honored by the bank due to insufficient funds in the bank accounts. What does this mean? This means that the check amount has not been deposited in your bank account. As a result, you will have to deduct it from your cash account records.
  3. Errors in the cash account result in an incorrect amount being entered or an amount being omitted from the records. The correction of the error will increase or decrease the cash account in the books.

#4. Compare The Balance

After adjusting the balances as per the bank and as per the books, the adjusted amounts should be the same. If they are still not equal, you will have to repeat the process of reconciliation again.

Once the balances are equal, businesses need to prepare journal entries for the adjustments to the balance per book. Let’s get on with how to calculate an outstanding check.

How to Calculate Outstanding Checks

As seen on money-zine.com: Company Z recorded $200,000 in checks drawn from its general account in the month of December.  During the November bank statement reconciliation process, Company Z determined it has a balance of $12,000 in outstanding checks.  The bank statement received by Company Z showed checks paid of $196,000 in December.  Company Z’s outstanding checks at the end of December would be calculated as:

Outstanding Checks (Starting Balance)$12,000
Add:  Checks Written$200,000
Total checks to be paid$212,000
Less:  Checks Paid (Per Bank Statement)$196,000
Outstanding Checks (Ending Balance)$16,000
Source: Money-zine

Hope with the above illustration, we can now calculate our outstanding checks? now let us look at the example of outstanding checks.

Outstanding Checks Examples

In showing the examples of outstanding checks, a company ABC is closing its books and must prepare a bank reconciliation for the following items:

  1. A bank statement contains an ending balance of $300,000 on February 28, 2018, whereas the company’s ledger shows an ending balance of $260,900
  2. The bank statement contains a $100 service charge for operating the account
  3. The bank statement contains interest income of $20
  4. ABC issued checks of $50,000 that have not yet been cleared by the bank
  5. ABC deposited $20,000 but this did not appear on the bank statement
  6. A check for the amount of $470 issued to the official supplier was misreported in the cash payments journal as $370.
  7. A note receivable of $9,800 was collected by the bank.
  8. A check of $520 deposited by the company has been charged back as NSF.

We have come to the end of the study on the outstanding checks, I hope you did enjoy reading it and you got the information you needed to know? Also, if you do have any question,feel free to use the comment box.

How Do You Account For Outstanding Checks?

When calculating the adjusted balance per bank during the bank reconciliation process, the total amount of outstanding checks is subtracted from the ending balance on the bank statement.

Do you add outstanding checks?

They must be accounted for on the bank statement. Outstanding checks are those that have been written and recorded in the business’s cash account but have not yet been cleared by the bank.

Is Outstanding Checks Part of Cash?

An outstanding check is a check payment that has been recorded by the issuing entity, but has not yet cleared its bank account as a cash deduction. This idea is utilized to derive the month-end bank reconciliation.

Why Are Outstanding Checks Deducted?

These checks are called “outstanding checks,” and they make the cash balance on the bank statement look higher than it really is. Since outstanding checks have already been recorded as cash payments in the company’s books, they need to be taken out of the bank statement balance.

What Happens if a Check Is Never Cashed?

In a process called “escheatment,” the payor must give the money to the state if a paycheck has not been claimed for a long time.

Is Outstanding Checks a Bank Reconciliation?

Any outstanding checks that still haven’t been paid by the bank will need to stay on the list of outstanding checks. Any deposits that are in the process of being made but don’t show up on the bank statement will still be reconciling items that need to be looked into with the bank.

What Happens to Outstanding Checks When Someone Dies?

In most cases, the debts of a person who has died are paid by their estate. When someone passes away, their property goes to their estate. Usually, a debt won’t be paid if there is no money or property left.

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