What it means
When you run a business, you often write checks to pay suppliers, landlords, or service providers. The moment you write that check, you subtract the amount from your internal accounting records to ensure you know your current balance.
However, the bank does not know about this payment until the recipient actually deposits the check and their bank asks your bank for the money. This delay creates a gap between your internal balance and your official bank statement balance.
This delay matters because it can easily lead to a false sense of security. If your bank statement shows a higher balance than your internal ledger simply because several checks have not cleared yet, you might accidentally spend money that is already spoken for.
Tracking these items prevents bounced payments and overdraft fees, which can damage your business reputation and cost extra money. In everyday business practice, outstanding checks are monitored through a process called bank reconciliation.
At the end of every month, you compare your bank statement with your internal bookkeeping software. You take your bank statement balance, subtract any outstanding checks that have not cleared yet, and add any deposits in transit.
This gives you your true available cash balance. Managing this timing difference helps you avoid cash flow surprises.
While physical checks are becoming less common in many regions, the same timing principle applies to electronic payments that take a few days to process through the banking system. Imagine mailing a letter to a friend with a $20 bill inside.
The moment you drop it in the mailbox, you mentally subtract that $20 from your wallet funds. However, your friend has not received it yet, so your actual physical wallet still contains the cash until they open the letter and spend it.
In practice
Real-world examples
Example 1
You write a $500 check for office supplies on May 25. You record the expense immediately, but the supplier only deposits it on June 2. For that week, it is an outstanding check, and it must appear on your May bank reconciliation as a reconciling item.
Example 2
A boutique bakery sends a $1,200 rent check to the landlord on the 28th of the month. The landlord forgets to deposit it until the following month, creating an outstanding check discrepancy. The bakery's bank statement shows $1,200 more than its ledger until the check clears.
Example 3
An independent tech consultancy issues a $3,500 contractor payment on a Friday. Because of the weekend and bank processing times, the check remains outstanding for four business days. The finance lead checks the cash position against the ledger, not the bank portal, before approving any other payments that week.
Think of it
Imagine mailing a letter to a friend with a $20 bill inside. The moment you drop it in the mailbox, you mentally subtract that $20 from your wallet funds. However, your friend has not received it yet, so your actual physical wallet still contains the cash until they open the letter and spend it.
Formula
Calculation
True Cash Balance = Bank Statement Balance - Outstanding Checks + Deposits in Transit
Example:
Bank Statement Balance = $10,000
Outstanding Checks = $2,500
Deposits in Transit = $1,000
True Cash Balance = $10,000 - $2,500 + $1,000 = $8,500Case study
Seen in the real world
This is a fictional, illustrative scenario. GreenLeaf Landscaping, a mid-sized garden maintenance firm, experienced a cash flow scare last autumn. The owner, Sarah, checked her online bank account and saw a balance of $14,000. Relieved, she authorised a purchase of new lawnmowers for $9,000.
Two days later, three large supplier checks that she had mailed the previous week finally cleared the bank. This caused her account to drop below zero, resulting in overdraft fees and an angry call from a supplier whose check bounced. She learned that she had $6,000 in outstanding checks at the time she looked at her online balance. Her true available cash was actually 14,000 - 6,000 = $8,000, not $14,000, so the $9,000 purchase left her $1,000 short.
Realising her mistake, Sarah instituted a strict bank reconciliation routine. By starting regular monthly reconciliations and accounting for outstanding checks before making major purchases, GreenLeaf Landscaping avoided further banking penalties and gained a clear, accurate view of its everyday finances. She also asked her bookkeeper to keep a running list of unpresented checks that she could view at any time.
Watch out
Common mistakes
- Assuming the cash balance shown on your online bank portal is your true available money without checking for uncleared payments.
- Forgetting to record a check in your internal accounting system the day you write it, leading to inaccurate expense tracking.
- Removing an outstanding check from your records too early before confirming it has actually cleared the bank.
Questions
People also ask
How long can a check remain outstanding?
Most checks are valid for six months, though banks are not legally obligated to cash personal or business checks older than six months. Some business checks state they are void after 90 days.
What happens if a check is never cashed?
If a check remains outstanding indefinitely, you may need to follow your local unclaimed property laws, which often require businesses to turn these funds over to the state after a set period.
Are outstanding checks considered an asset or a liability?
They are neither assets nor liabilities on their own; rather, they represent a reduction in your cash asset that has not yet been processed by the banking system.