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Say I write a check (in British English, a cheque) to pay money to some supplier out of my business's current account. I post the check.

As far as I'm concerned, the company has spent that money and it needs to be noted down. The money won't leave my company's electronic current account until the check reaches its destination and has been taken to some other bank and processed.

How should I represent this correctly? Should I open a liability account? Would "outstanding checks" be the correct name for this?

To try to answer this for myself I've read about double entry bookkeeping and searched, including looking for spelling as "check" and "cheque". Best I've found is this http://www.double-entry-bookkeeping.com/category/bank-cash/

I can't live with the fact that my accounts package would report a different current account balance from the bank for a while. Correct approach or suggestions for further reading much appreciated.

Extra info: the time horizon (time the written and signed check might be "out there") is several days at least and, in the general case, unknown. The check could easily be in the post at the end of the reporting period, because that's when I tend to write checks for certain things. So I'm looking for an answer, if there is one, that keeps my books "live" and accurate at all times.

Update - well, this isn't an entirely academic question - I actually need a solution to this! As a working attempt, I've opened up an account under liabilities called "Cheques written" and entered the amount there, with a corresponding entry in the appropriate expenses account. When the electronic transfer finally goes over, I'll enter it against the business's current account and against the "Cheques written" account, which will bring the liability back to zero (assuming no more cheques meantime) and keep the accounts package always aligned with the "truth" on the bank's statement. Is this a sensible way to handle things - am I storing up trouble for later?

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    The first thing you need to ask yourself is, what is the time horizon for the differences? If the horizon is a couple days, and you generally deal with monthly reports, you shouldn't worry about it – serakfalcon Sep 4 '14 at 2:32
  • Thanks for the input. I've added extra info to explain this in my question. – mozz100 Sep 4 '14 at 7:48
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I'm no accounting expert, but I've never heard of anyone using a separate account to track outstanding checks. Instead, the software I use (GnuCash) uses a "reconciled" flag on each transaction. This has 3 states: n: new transaction (the bank doesn't know about it yet), c: cleared transaction (the bank deducted the money), and y: reconciled transaction (the transaction has appeared on a bank statement).

The account status line includes a Cleared balance (which should be how much is in your bank account right now), a Reconciled balance (which is how much your last bank statement said you had), and a Present balance (which is how much you'll have after your outstanding checks clear).

I believe most accounting packages have a similar feature.

  • Thank you. My question was more about book-keeping principles than a specific accounts package, but I am using GnuCash, and your answer is an excellent explanation of this feature. I wasn't using it, being unaware of its full purpose, until now. For others using this, it's documented here: gnucash.org/docs/v2.4/C/gnucash-guide/txns-reconcile1.html and you can add columns to the "Accounts" view (at least in my version of GnuCash) by clicking a green "down arrow" at the top right. This includes Cleared, Reconciled and Present. – mozz100 Sep 9 '14 at 9:57
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I have no idea what the traditional accounting way of dealing with this might be; but does your accounts package has the concept of subaccounts within a bank account?

If so, to me it would make sense that when a cheque is written, you move money in the accounts package from the bank account to a subaccount named 'Cheques Written'; then when it is cashed, move money from that subaccount to the supplier.

Then from a reporting perspective, when you want a report that will correspond to your actual bank statement, run a report that includes the subacconut; when you want a report that tells you how much you have available to spend, rune a report that excludes the subaccount.

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