how outstanding checks work
one of the ways of making payment for a transaction is by check a check is a financial instrument that authorizes a bank to transfer funds from the payor s account to the payee s account when the payee deposits the check at a bank it requests the funds from the payor s bank which in turn withdraws the amount from the payor s account and transfers it to the payee s bank when the bank receives the full amount requested it deposits it into the payee s account a check becomes outstanding when the payee doesn t cash or deposit the check this means it doesn t clear the payor s bank account and doesn t appear on the statement at the end of the month since the check is outstanding this means it is still a liability for the payor once the payee deposits the check it is reconciled against the payor s records checks that remain outstanding for long periods of time cannot be cashed as they become void some checks become stale if dated after 60 or 90 days while others become void after six months risks of outstanding checksoutstanding checks aren t necessarily inherently bad however there are some risks and downsides to have checks linger an overdraft occurs when the account holder who wrote a check that is still pending does not have enough money in their account to cover the amount of the check when it is eventually submitted for payment this can result in the account becoming overdrawn at the time the check was written there might have been enough cash however if spending on the account occurs between when the check is written and when the check is deposited the account is at risk for non sufficient funds status outstanding checks also have the risk of being used in fraudulent conduct someone else could be able to change the payee name or the amount if a check is misplaced or stolen before it is taken to the bank all else being equal it is safest if a check is deposited as fast as possible to avoid tampering with the instrument accounting inconsistencies may arise if outstanding checks are not reported and tracked in the appropriate manner because of this keeping correct financial records can be difficult and it may lead to problems during audits or when reconciling finances for example payments may show as being paid but if the cash has not yet been debited from the account there may be inconsistencies worth reconciling last outstanding checks might have an impact on management of the cash flow if a corporation has a substantial number of checks that have not yet been cashed it may create ambiguity over the amount of cash that is available making it difficult to efficiently plan for and manage expenses outstanding checks that remain so for a long period of time are known as stale checks benefits of outstanding checksthere are actually some benefits to have checks outstanding as well though writing checks makes it possible for organizations and individuals to make payments without requiring instantaneous cash or electronic transactions to be completed checks that linger only buy the company more time to gather up enough resources for payment to clear if more time is needed tracking of payments can be accomplished through the use of checks which provide both a paper trail and evidence of payment through the use of the check the sender and the recipient of the payment are able to retain a record of the transaction which includes the date the amount and the payee in this context an outstanding check need not be outstanding for long it may simply be the short period of time between when a check is mailed and when it is received outstanding checks also provide the opportunity for payment delays which can be advantageous when it comes to managing cash flow the person who writes a check that is not immediately presented for payment is able to maintain control over the timing of the withdrawal of funds from their own account if the check is not immediately offered for payment even if the checkwriter has sufficient funds any delay from the depositor simply means higher interest revenue on the capital balance waiting to be drawn down 