Journal Entry to Write-off Outstanding Checks

Check is the document that orders the bank to pay a specific amount to the holder. The cash is deducted from the check owner to the check holder. It is a promissory note that guarantees the payment to the holder.

The account owner writes a check with the holder’s name to allow the bank to deduct his money and give it to the holder. Check owner needs to ensure enough balance in his account otherwise it will cause more problems. The bank will penalty anyone who issues a check without enough cash as it will impact the bank name as well. Moreover, the check holder can bring the insufficient check to court and sue the issuer.

An outstanding check is a check that the company has already issued to suppliers but they do not yet deposit at the bank. The company already reflect this transaction in the accounting record, however, the supplier has not yet cashed out the check with the bank due to various reason.

When issuing the check, the owner is already recorded the business transaction, it credits the cash from the balance sheet and debits various accounts. So in order to write off the outstanding check, we need to debit cash at bank back and the credit side may depend on the original transaction.

Why do we need to write off outstanding check

Check owner may want to cancel the check and prevent the holder from cashing out from the bank. It can happen due to many reasons such as fraud or scams. Supplier may not deliver the goods after getting the check. Or they do not complete the service and the issuer cannot contact them to negotiate.

The issuer needs to inform the bank regard to this issue and stop the holder from getting cash over a specific check number. The bank needs the authorized letter from the company with approval from the authorized person.

After receiving the official letter from company bank will inform their staff to void the check when it is present at the bank. Even the supplier brings the cheque to the bank, they will not receive the cash from the bank. They need to contact back to the check owner to discuss the

Journal Entry to Write-off Outstanding Checks

When the company issue check, the accountant credit cash at bank and debit other accounts such as assets, liability, or expense. So in order to write off an outstanding check, we need to look at the original entry and reverse it back.

We have to check the original entry to ensure that

Journal entry to write-off outstanding check – accounts payable

The most frequent use of checks is to pay off the accounts payable. The company issue checks to settle the outstanding accounts payable with the supplier. After issuing the check, they will debit accounts payable and credit cash at the bank.

Account	Debit	Credit
Accounts Payable	000
Cash at Bank		000

The entry simply reduces cash at bank in the company balance sheet and decreases accounts payable.

However, if the company cancels the outstanding check before the supplier cash out from the bank, they have to reverse back the transaction. They need to make a journal entry to write off the outstanding check by debiting cash at bank and credit accounts payable. The entry simply reverses back the original entry by increasing back the cash balance and accounts payable.

Account	Debit	Credit
Cash at Bank	000
Accounts Payable		000

We may wonder that how do we debit the cash at the bank while we do not receive any actual cash. This transaction is to reverse back the original transaction which we credit cash while the actual cash at bank does not decrease yet. The supplier did not present a check at the bank yet, so our cash balance remains the same. By canceling the check, we need to debit back cash in our balance sheet.

Journal entry to write-off outstanding – Assets

The company may purchase assets from suppliers and pay using the check. It is very normal for the business to issue checks and settle after receiving goods. After paying to the supplier, the accountant record debit assets and credit cash at bank. The assets can be inventory, fixed assets, and so on.

Account	Debit	Credit
Assets	000
Cash at Bank		000

Subsequently, the company wants to return the goods and cancel the outstanding check. The problem happens when the goods is damaged, low quality, or wrong specification. So they decide to return the goods and void the check before the supplier deposit it at the bank.

The company makes journal entry by debiting cash at bank and credit assets.

Account	Debit	Credit
Cash at Bank	000
Assets		000

Cash at the bank will be added back to balance sheet as the actual cash is not yet cash-out by the supplier. Assets are transferred back to the supplier, so we need to credit from the balance sheet as well.

Journal entry to write-off outstanding – Expense

Besides of two examples above, the company may use the check to pay for expenses such as consulting services, utilities, and other services. The company will record debt expenses and credit cash at bank.

Account	Debit	Credit
Expense	000
Cash at Bank		000

Later on, the company wants to cancel the check to delay the payment. They already consume the service so they cannot return the service back. They may want to delay the payment by using bank transfers or cash on hand instead.

To cancel the check, company needs to debit cash at bank and credit accounts payable as they delay the payment.

Account	Debit	Credit
Cash at Bank	000
Accounts Payable		000

The company just delay the payment, so they need to recognize accounts payable. We cannot credit expense as the company already consume the service, they can only delay the payment.

In some cases, the company may credit expense when the supplier agree to waive the expense and provide free service. It is not a case that we normally see in real life.