In Preparing A Bank Reconciliation Outstanding Checks Are

In Preparing a Bank Reconciliation, Outstanding Checks Are… A Detailed Explanation

Bank reconciliation is a crucial accounting process that ensures the accuracy of a company's cash balance. It reconciles the company's cash balance per its books with the cash balance reported by the bank statement. One of the key elements in this process is understanding and correctly handling outstanding checks. This article will comprehensively explain what outstanding checks are, their importance in bank reconciliation, and how to properly account for them to ensure accurate financial reporting.

What are Outstanding Checks?

Outstanding checks are checks issued by a company but have not yet been cashed or cleared by the bank. This means the company has already recorded the check as an expense (reducing its cash balance on the books), but the bank hasn't yet deducted the amount from the company's bank account. They remain "outstanding" until the recipient deposits and cashes them.

Think of it like this: you write a check to pay your rent. You record the expense in your accounting software, reducing your cash balance. However, your landlord hasn't deposited the check yet. From the bank's perspective, the money is still in your account. This discrepancy needs to be reconciled. This check represents an outstanding check until it clears the bank.

Why do Outstanding Checks Occur?

Several factors contribute to the existence of outstanding checks:

• Mailing Time: It takes time for checks to be mailed and received by the payee. The delay between issuing the check and its deposit creates a lag in the bank's records.
• Payee's Delay: The recipient might delay depositing the check for various reasons, such as waiting for a more convenient time or prioritizing other financial transactions.
• Weekend and Holiday Processing: Banks do not process checks on weekends or holidays. Checks issued just before a holiday might not clear until the following business day.
• Large-volume processing: Businesses dealing with a high volume of transactions may experience delays in check clearing.
• Errors in check processing: Rarely, there might be errors in the processing by either the issuing company or the receiving bank.

The Importance of Outstanding Checks in Bank Reconciliation

Outstanding checks are a critical part of bank reconciliation because they directly impact the accuracy of the cash balance. If not properly accounted for, they create a significant difference between the company's book balance and the bank statement balance, leading to inaccurate financial reporting.

Failing to account for outstanding checks can result in:

• Misstated Cash Balance: The company's reported cash balance will be inaccurate, potentially leading to incorrect financial decisions.
• Inaccurate Financial Statements: Incorrect cash balance affects the balance sheet, which in turn influences other financial statements.
• Internal Control Weaknesses: The inability to accurately reconcile the bank statement points to potential weaknesses in the company's internal control systems.
• Auditing Issues: During an audit, discrepancies caused by unaccounted-for outstanding checks can raise concerns and require further investigation.

Identifying and Reconciling Outstanding Checks

The process of identifying and reconciling outstanding checks involves careful comparison of the company's records with the bank statement.

Steps to Identify Outstanding Checks:

1. Gather Necessary Documents: Obtain the bank statement for the period and the company's cash disbursement records (check register, accounting software reports).
2. Compare Checks Issued: Carefully compare the checks issued during the period (as recorded in the company's records) with the checks that have cleared the bank (as shown on the bank statement).
3. Identify Un-Cleared Checks: Any check issued but not yet cleared by the bank is an outstanding check. Note the check number, date issued, and amount.
4. Prepare a Schedule: Create a schedule listing all outstanding checks, including their check number, date, and amount. This schedule will be used in the bank reconciliation process.

How Outstanding Checks are Handled in Bank Reconciliation:

Outstanding checks are added to the bank balance in the bank reconciliation. Remember, the bank statement reflects the cash balance as seen by the bank, which hasn't yet deducted these outstanding payments. Therefore, to arrive at a true cash balance, the outstanding check amounts must be subtracted from the bank statement balance.

Example:

Let's say the bank statement shows a balance of $10,000. Outstanding checks total $1,000. To reconcile, you would subtract the $1,000 from the bank statement balance of $10,000, resulting in an adjusted bank balance of $9,000.

Common Errors in Handling Outstanding Checks

Several errors can occur when dealing with outstanding checks during bank reconciliation. These include:

• Duplicate entries: A check might be accidentally listed twice, either in the check register or the outstanding check schedule. This can cause significant errors in the reconciliation.
• Incorrect amounts: The amount recorded for an outstanding check might be different from the actual amount written on the check. This usually arises due to human error.
• Missing checks: An outstanding check might be omitted from the schedule, leading to an inaccurate reconciliation.
• Timing Issues: Checks issued close to the month-end might not appear on the current statement and can be overlooked.

Preventing Errors and Improving Efficiency

To minimize errors and improve the efficiency of bank reconciliation, businesses should adopt these best practices:

• Regular Reconciliation: Perform bank reconciliations frequently, preferably monthly. This allows for the timely identification and correction of any discrepancies.
• Automated Processes: Utilize accounting software with bank reconciliation features to streamline the process and reduce the risk of human error. Many software programs can automatically download bank statements and compare them to the company's records.
• Proper Check Management: Establish a well-defined system for tracking checks, including proper numbering, authorization, and timely recording.
• Clear Separation of Duties: Different individuals should be responsible for writing checks, recording payments, and reconciling the bank statement. This reduces the risk of fraud and error.
• Regular Review of Reconciliations: Management should regularly review bank reconciliations to ensure accuracy and identify any potential problems.
• Training and Documentation: Adequate training for employees responsible for handling checks and performing bank reconciliations is essential. Clear documentation of procedures helps maintain consistency.

Outstanding Checks and Internal Controls

The process of handling outstanding checks is an important aspect of a company's internal controls. A robust system helps prevent fraud and ensures the accuracy of financial reporting. Key internal controls related to outstanding checks include:

• Segregation of duties: Different individuals should be responsible for preparing and signing checks, recording transactions, and performing bank reconciliations.
• Independent verification: A supervisor should regularly review the bank reconciliations to ensure accuracy.
• Reconciliation procedures: Clear and documented procedures should be followed for identifying and reconciling outstanding checks.
• Check numbering system: Using a sequential numbering system helps ensure that no checks are missing.
• Physical security of checks: Checks should be stored securely to prevent unauthorized use.
• Regular reviews of controls: Internal control systems should be regularly reviewed and updated to address any identified weaknesses.

Conclusion

Outstanding checks are a crucial element in bank reconciliation. Understanding what they are, why they occur, and how to accurately account for them is essential for maintaining accurate financial records and ensuring strong internal controls. By following the procedures and best practices outlined in this article, businesses can improve the efficiency and accuracy of their bank reconciliation process, leading to more reliable financial reporting and better decision-making. Ignoring outstanding checks can lead to significant financial inaccuracies and potential problems with audits. Therefore, proper handling of outstanding checks is paramount for financial health and regulatory compliance. Regular reconciliation, implementing strong internal controls, and using accounting software effectively can minimize errors and improve efficiency, ensuring accurate and timely financial statements.