How are checks that have not yet cleared the bank (outstanding checks) treated in preparing a bank reconciliation, and what does that look like in an example?

What makes a check outstanding?

A check is outstanding when two things are true at the statement date you are reconciling: you have recorded it, and the bank has not yet paid it. Because it has not cleared by the end of the month, it does not appear on that month's bank statement, and so it becomes a reconciling item.

The gap exists because a check takes time to travel: it has to be delivered, and the payee has to deposit it, and it takes longer still if you put off mailing it.

So at the statement date the two records disagree for a reason that is not an error.

The check is also still a real obligation. It remains a liability of the payer until the payee presents it for payment. That matters later, when an item has been on the list a long time: age alone does not make it go away.

Which balance does an outstanding check adjust, and in which direction?

Outstanding checks reduce the bank balance. On the reconciliation you start from the balance the statement shows and subtract every check that has not yet cleared the bank. The result is the adjusted bank balance, which should agree with your adjusted book balance.

The book side is left alone because your records are already right. You recorded the check when you issued it, so the cash account already reflects the payment. Adjustments made on the bank side of a reconciliation need no entry in your books. The bank will catch up when the payee deposits the check.

A frequent mistake is to reverse this and deduct the outstanding check from the book balance, or to post an entry for it. That counts the payment twice, once when you issued the check and again on the reconciliation, and it opens a difference equal to double the check amount. The worked example below shows what that looks like, so you can recognise it if a difference of exactly twice a check amount appears.

How do you build the outstanding list?

Build the list by comparison, not by memory. Compare the amount of every check the bank paid, as shown on the statement, with the amount of every check recorded in your cash account. Any check in your record that the statement does not show as paid, and that you issued on or before the statement date, goes on the list.

Work from a record of issued checks that you can compare line by line. For each check, that record should carry at least:

• the check number;
• the date it was issued;
• the payee;
• the amount as you recorded it.

The check number is what lets you match a paid item on the statement to a line in your record, so a record that skips numbers, or that holds checks without numbers, makes the match unreliable. The amount is what tells you whether the bank paid what you wrote. The date is what tells you which period's list the check belongs to.

The period-by-period routine is set out under carrying the list forward, below. Scan the check numbers for gaps: a missing number is a check that was written and not yet entered, spoiled, voided, or still unused - each one must be accounted for before the list is treated as complete (see the next section).

What if some checks are written by hand outside the accounting system?

If checks are also written from a paper checkbook, or by a second signer from a separate book, your accounting system's record of issued checks is incomplete. An outstanding list built from it will leave out any handwritten check that has not cleared, and the reconciliation can still appear to agree, because the same check is also missing from your book balance.

Before you build the list, enter every manually written check into the accounting record, using the checkbook stubs or carbon copies. Show that the list is complete by reconciling the check-number sequence: every number from the first check of the period to the last must be recorded as issued, recorded as voided or spoiled, or still unused in a checkbook you can produce. A gap you cannot explain is a check you have not captured.

Which checks belong on this period's list?

The list is drawn up as at one fixed date: the statement date of the period you are reconciling, not today.

• Recorded with a date on or before the statement date and not shown as paid. It belongs on this period's list.
• Recorded with a date after the statement date. It does not belong on this list, even if it was written before you sat down to reconcile. It is not in the book balance at the statement date either, so listing it would push the adjusted bank balance down with nothing to match it on the book side. It belongs to the next period's list.

Checks written in the last few days before the statement date need particular care, because they are the ones most likely to be still in the mail or undeposited. A check belongs on the list for a statement date if it is in your cash-account balance as at that date - recorded with a date on or before the statement date - and the statement does not show it paid. Use the check's recorded date, not the day you keyed it or the day you mailed it. A check recorded before the statement date but mailed after it is still on the list, because the books already carry it; the sources set no separate rule for it.

How is the list carried forward and cleared?

Keep the list and carry it forward. Do not rebuild it from scratch each month. It is common for a few checks written in earlier months to still be outstanding at the end of the current month, and a list rebuilt only from the current month's checks silently drops them. Those are the very items most in need of attention.

Each period:

1. Start from last period's outstanding list.
2. Add the checks issued during this period.
3. Remove a check when this period's statement shows the bank paid it. If it was paid at a different amount from the one you recorded, remove it from the list and resolve the difference as an error (next section) - it is no longer outstanding.
4. Carry everything else forward as this period's list.

The trigger for removing a check from the list is payment by the bank. Age is never a reason to take a check off. Because the check remains a liability until the payee presents it, dropping an old check from the list quietly changes your cash balance with no event behind it and makes a real obligation disappear from your records.

How do you tell a timing difference from an error in your books?

A genuine outstanding check has a simple profile: it is in your record once, at the amount you wrote, it has been or will be sent, and the bank has not yet paid it. Anything that fails one of those tests is not a timing difference.

Test each item against these questions.

• Is it in your record twice? A duplicate entry for one check leaves the second copy on the list month after month, because the bank will only ever pay the check once. Look for two entries with the same number, or the same payee and amount, close together.
• Did the bank pay it for a different amount? If the statement shows the check number as paid but for a different amount, the check is not outstanding. Compare your recorded amount with the paid amount. A difference means the check was recorded wrongly, either in your books or by the bank.
• Was it actually sent? A check that was recorded but then torn up, lost before mailing, or never going to be sent is not waiting to clear. Find out what happened to it. If it will not be sent, it is dealt with as a voided check, which is a separate Question.
• Is it still in your hands? A check that is recorded but still in your hands at the statement date, and that you will send, is an outstanding check with a delayed release: the books already carry it, so it stays on the list. Note the date you actually release it beside the recorded date so the roll-forward review can see why it is slow to clear. Only a check that will not be sent leaves the list, through the voided-check Question.
• Did the bank pay it in a form you did not match? A check can appear on the statement without its number, or under a description you did not expect. Before listing it as outstanding, search the statement's debits for the amount and the payee, not only the check-number column.

Errors in your own records are corrected on the book side, with an entry in your books. They do not go on the outstanding list.

Check the paid amount against the check itself (the copy, stub or image). If the check was written for the amount the bank paid, your books are wrong: correct them and take the check off the list. If the check was written for the amount you recorded and the bank paid something else, it is a bank error: leave your books alone, show the difference on the bank side of the reconciliation and raise it with the bank.

For example, suppose your record shows check 987 at 2,030.00, but the statement shows check 987 paid at 2,300.00. The check copy shows 2,300.00, so the books are wrong: two digits were switched when it was entered, which is one type of book error. Check 987 is not outstanding at all. It has cleared, and your books understated the payment by 270.00. Correct the books; do not list the check.

When does a long-outstanding check stop being an ordinary timing difference?

Review the list every period for checks that have rolled forward from an earlier statement. Some checks are presented only after a long delay, and some are never presented. While a check is recent, treat it like any other uncleared check and keep it on the list. Once it has been outstanding for a long time, contact the payee to find out whether they ever received it. The sources set no number of statements for that point. As a practical prompt, not a rule, ask about any check that has rolled through more than one statement without clearing.

What happens next, whether to void and reissue the check or how to treat a check that has become stale, is covered in the Question on stale checks. Keep the check on the list until that decision is made and recorded in your books. Returned and non-sufficient-funds checks are covered in their own Question too, and a voided check in another.

What if you are reconciling a period that ended long ago?

When you catch up on an old period, you often already hold later statements. Build the list as it stood on the statement date of the period you are reconciling: a check issued on or before that date and not paid on that period's statement is outstanding for that period, even if you can see it cleared on a later statement.

Use the later statements to corroborate, not to rewrite. Seeing check 1044 paid on the July statement is good evidence that it was a genuine timing difference at June 30, and that its amount was right. But it does not take the check off the June list. Record its clearance in July, when the bank paid it, and never back-date the clearance into June.

What does this look like in a worked example?

A business reconciles its checking account at June 30. At May 31 two checks were outstanding: 1036 for 400.00 and 1039 for 250.00. There were no deposits in transit and no bank charges in either month, so outstanding checks are the only reconciling items.

Step 1: the issued record for June, plus last period's list.

Step 2: the checks the June statement shows as paid. 1036 (400.00), 1040 (1,200.00), 1041 (850.00) and 1042 (2,300.00), each at the amount recorded.

Step 3: the outstanding list at June 30. 1039 (250.00, carried from May), 1043 (615.00) and 1044 (1,480.00). Total 2,345.00. Check 1045 is left off because it was issued after the statement date.

Step 4: the reconciliation at June 30.

The books are not touched and no entry is made. Had the 2,345.00 been subtracted from the book balance instead, books would show 14,055.00 against a bank balance of 18,745.00, a difference of 4,690.00: exactly double the outstanding total.

Step 5: carry forward and clear in July. During July the business deposits 5,000.00, all credited by the bank in July, and issues checks 1045 (390.00, July 2) and 1046 (720.00, July 30). Books at July 31: 16,400.00 + 5,000.00 − 390.00 − 720.00 = 20,290.00.

The July statement shows 1043 (615.00), 1044 (1,480.00) and 1045 (390.00) paid. Starting from the June list, 1043 and 1044 are removed because the bank paid them. 1039 is not paid and carries forward again. 1046 is added.

The bank figure follows from June: 18,745.00 + 5,000.00 − 615.00 − 1,480.00 − 390.00 = 21,260.00.

Check 1039 has rolled through two statements: it is the one to ask the payee about, while it stays on the list.