An outstanding check of 90 days or more can greatly affect a business’s books. Some business owners might overlook outstanding checks because this looks like a positive turn of events. Undeposited checks can cause accounting problems when the recipient finally decides to deposit the check.

Furthermore, checks that are never cashed may constitute “unclaimed property” that is turned over to the state.

Why Checks Are Not Deposited

A payee might not deposit or cash a check for several reasons:

  • No urgency: Payees sometimes do not need the funds right away to make purchases, so there is no hurry to deposit the check.
  • Falling through cracks: Checks sometimes get buried under a pile of paperwork or simply misplaced.
  • Delivery problems: sometimes a payee never received the check due to a change of address. If the receiver at the new address does the right thing, one would possibly send the check back.

Why Outstanding Checks Matter

When someone has been paid with a check, the check must be deposited or cashed to receive payment. The payee’s bank will then request money from payer’s bank account to be transferred into the payee’s bank account.

If a check is never deposited for whatever reason, the money remains in the payer’s account. This might seem like a positive thing for the payer, but this can cause problems down the line.

Inflated Account Balance
If the written check amount never leaves the account, the payer may think they have more funds available to spend, but the money still belongs to the payee. If the payee finally deposits the check after months of delay, the payer risks overdrawing his account and bouncing the check.

Unclaimed Property
Most people are not aware of this law. Businesses must track outstanding items to avoid breaking unclaimed property laws. If payments to employees or vendors remain uncashed, they eventually must turn over those assets to the state. This typically occurs after a few years, but timetables vary from state to state.

Business Accounting
Businesses must track income, expenses, and accounts payable. When payments remain outstanding, complications can arise. The payment goes on the general ledger, but businesses must make adjustments during reconciliation, and they may need to reissue stale checks.

What to Do About Outstanding Checks

To avoid future complications, businesses must be proactive with outstanding checks. No matter how one looks at it, the business still owes the money. The first step for any businesses is to use an accounting system that deducts any uncashed checks from available funds. Then the business will want to track down the old check. Here are a few ways to go about tracking down the stale check.

Call or Write
Call or email payees who fail to deposit checks, and confirm that they have received the check.  If they have the check, ask them to deposit the check immediately. If they fail to comply to the request, send a letter informing the payee that the check has not been deposited, and request a formal notification if they have not received the payment.

Keep Records
Document communication regarding outstanding checks. This documentation will be useful if the business needs to prove to state regulators that reasonable attempts were made to complete the payment. If an outstanding check is cashed after the bank was asked to stop the payment, the payer will be responsible for proving that he took the necessary steps to cancel the payment.

Electronic Funds
Businesses can reduce a surprise withdrawal by paying their bills online with their bank’s online bill pay or by using a credit or debit card.

When to Write Another Check

If the payee requests another check, be sure to have them send the old check back first before sending out the new one. This will prevent the accidental deposit of both checks. If the old check has been lost or destroyed, the payer will want to stop payment on the original check with the bank, and come to a written agreement about the payments. The agreement will not stop the bank from cashing both checks, but this will provide a paper trail if any legal situation arises for disputing one of the deposits.

About SoCal Elite Accounting

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