What it means
When you run a business, you often write cheques to pay suppliers, landlords, or utility providers. The exact moment you write that cheque, you record the expense in your accounting system and subtract that amount from your internal ledger.
However, the money does not actually leave your bank account until the recipient deposits the cheque, and their bank clears it with your bank. This delay creates a temporary gap between your internal cash balance and your official bank balance.
This matters because monitoring your cash flow accurately depends on understanding this timing difference. If you look only at your bank balance, you might think you have more money available to spend than you actually do, because the bank has not yet subtracted the cheques you have already mailed out.
Failing to account for this gap can lead to accidental overdrafts and bounced payments. To manage this, businesses perform a monthly bank reconciliation.
You compare your internal ledger against your bank statement, listing all outstanding cheques to bridge the gap. This process ensures your financial reports are accurate and helps you spot uncashed cheques that might indicate a lost payment or an unpaid supplier.
In daily operations, keeping track of these uncashed payments also protects against fraud and errors. If a cheque remains outstanding for many months, it serves as a red flag that the payee never received it, prompting you to investigate, cancel the original payment, and issue a replacement safely.
Imagine you mail a birthday card with a cash note inside. The moment you drop it in the post box, you cross that money off your mental spending budget.
But until your friend opens the envelope and puts the cash in their wallet, your bank account still holds the physical funds.
In practice
Real-world examples
Example 1
You write a $1,500 cheque for office rent on the 28th of June and record it immediately. Your landlord does not bank it until the 3rd of July. During those days, it is an outstanding cheque, and your June reconciliation must list it as a reconciling item.
Example 2
Your small manufacturing firm issues a $4,200 cheque to a steel supplier on Friday. The supplier keeps it in their safe over the weekend and banks it on Tuesday, leaving a four-day window of being outstanding. Your bank balance looks $4,200 healthier than it really is throughout that window.
Example 3
A boutique hotel issues a $750 refund cheque to a guest. The guest forgets to visit their branch for two weeks. The hotel must track this outstanding cheque to avoid misjudging their weekly cash reserves, and chases the guest if it is still uncashed after a month.
Think of it
Imagine you mail a birthday card with a cash note inside. The moment you drop it in the post box, you cross that money off your mental spending budget. But until your friend opens the envelope and puts the cash in their wallet, your bank account still holds the physical funds.
Formula
Calculation
Adjusted Bank Balance = Bank Statement Balance - Outstanding Cheques + Deposits in Transit
Example:
Your bank statement shows $10,000.
You have written cheques totalling $2,500 that have not cleared yet.
You have a customer deposit of $1,000 that the bank has not yet processed.
Adjusted Balance = 10,000 - 2,500 + 1,000 = $8,500.Case study
Seen in the real world
This is a fictional, illustrative scenario. GreenLeaf Landscaping, a small garden maintenance business in Bristol, ran into a cash flow puzzle at the end of October. The owner, Sarah, checked her online business bank account and saw a healthy balance of $12,000. Relying on this figure, she authorised the purchase of a new ride-on lawnmower for $4,500 by bank transfer.
Two days later, her debit card was declined at the checkout, causing major embarrassment. Confused, Sarah called her accountant, who explained the reality of outstanding cheques. Earlier that month, Sarah had written cheques totalling $8,000 to pay for wholesale plants, fuel, and uniform suppliers. While Sarah had properly recorded those expenses in her accounting software, none of those suppliers had deposited the physical cheques until after the purchase.
In the meantime, the bank balance fell to 12,000 - 4,500 = $7,500, and then to 7,500 - 8,000 = -$500 as the three cheques cleared. Her true available cash before the purchase was only 12,000 - 8,000 = $4,000, so the $4,500 purchase had been $500 more than she could afford. This incident taught Sarah the vital importance of bank reconciliations. From then on, she tracked her outstanding cheques weekly rather than trusting the raw bank balance, avoiding any future miscalculations.
Watch out
Common mistakes
- Assuming money is available to spend just because it still appears on your online bank statement.
- Forgetting to follow up on cheques that remain uncashed for more than six months.
- Recording the expense twice because you confused the date you wrote the cheque with the date it cleared.
Questions
People also ask
Why do cheques take time to clear?
Even with modern digital systems, physical cheques require processing time between the recipient's bank and the issuing bank to verify funds and signatures.
What should I do if a supplier never cashes a cheque?
Contact the supplier to check if they received it. If it is lost, you can stop payment with your bank and issue a new one.
Do outstanding cheques affect my profit and loss statement?
No. The expense is recorded on your profit and loss statement the day you write the cheque. Outstanding cheques only affect your cash balance on the balance sheet.