In accounting, businesses regularly issue checks for payments to vendors, employees, or other stakeholders. Occasionally, some checks remain uncashed for extended periods and eventually become ‘stale checks.’ A stale check is one that has not been presented for payment within a certain period typically six months, though this varies depending on local banking laws and company policies. Handling these checks correctly in the books is essential for accurate financial reporting and reconciliation. Understanding the appropriate journal entry for stale checks helps maintain transparency and avoid understated or overstated liabilities.
What Are Stale Checks?
A stale check is a check that is no longer valid due to the passage of time. Most checks include a note such as void after 180 days or a similar duration. If the payee does not deposit or cash the check within that time frame, it becomes stale. In accounting, this unclaimed liability remains in the books unless reversed or adjusted with a proper journal entry.
Reasons Checks Become Stale
There are several reasons why checks may go stale:
- The payee misplaced the check or forgot about it.
- The payee chose not to cash it for personal or business reasons.
- The check was returned or not delivered due to incorrect address details.
- The payee has closed the bank account linked to the check.
Regardless of the reason, the issuing company must eventually review and address these checks to ensure accurate records.
Accounting Treatment of Stale Checks
When a check becomes stale, it means the liability the company initially recorded may no longer exist. To correct this, an accountant must reverse the original payment entry. This ensures that the liabilities in the books reflect the actual obligations of the business.
When to Reverse a Stale Check
Most companies establish policies to review outstanding checks regularly usually during bank reconciliations. If a check has been outstanding for more than the threshold period (e.g., 180 days), and after proper follow-up with the payee, the company can proceed to reverse the check entry.
Impact on Financial Statements
- If not reversed, stale checks may result in overstated expenses or liabilities.
- Reversing stale checks improves accuracy in cash flow and liability reporting.
- In some cases, the amount may need to be transferred to a different liability account, such as ‘Unclaimed Property.’
Journal Entry for Stale Checks
The journal entry for stale checks depends on how the original transaction was recorded. Here’s a common scenario to illustrate the concept:
Original Entry When Check Was Issued
Assume a company issued a check for $1,000 to a vendor for services rendered. The original entry would have been:
Accounts Payable Dr $1,000 Bank/Cash Cr $1,000
This entry reduces the bank account and clears the vendor’s payable balance. However, if the check is never cashed, the payment technically hasn’t occurred, and this must be reversed.
Reversing Entry When Check Goes Stale
To reverse the stale check after a reasonable period has passed:
Bank/Cash Dr $1,000 Accounts Payable Cr $1,000
This entry restores the cash balance and re-establishes the liability to the vendor. It reflects that the company still owes the amount unless further action is taken, such as reissuing a new check or resolving the issue with the vendor.
Alternative: Transfer to Unclaimed Property
In some jurisdictions, stale checks must be reported and transferred to the state’s unclaimed property division if the rightful owner cannot be located. In this case, the journal entry might be:
Bank/Cash Dr $1,000 Unclaimed Liabilities Cr $1,000
This method depends on local laws and compliance requirements, especially for older outstanding checks.
Reissuing a Stale Check
If the payee later contacts the company and requests a new check, the accountant must reverse the stale check entry and issue a new payment. Here’s how that would be handled:
Reinstating the Liability
Accounts Payable Dr $1,000 Bank/Cash Cr $1,000
This entry clears the payable and issues a new check, ensuring that the financial statements reflect the correct cash and liability positions.
Best Practices for Handling Stale Checks
Managing stale checks effectively requires a systematic approach. Here are a few recommended best practices:
- Regularly review bank reconciliations for long-outstanding checks.
- Establish a policy for follow-up after 90, 180, and 365 days.
- Maintain documentation of communication attempts with payees.
- Consult legal and compliance teams for unclaimed property rules.
- Update internal procedures to prevent recurring stale checks.
Documentation Is Key
Before reversing or writing off any stale check, maintain proper documentation including:
- The original check details (amount, payee, date).
- Copies of emails or letters sent to the payee.
- Internal approvals or authorizations for reversal.
Internal Control Considerations
Stale checks, if not addressed, can pose a risk to internal controls. Unauthorized or duplicate payments may occur if these liabilities are not properly cleared. Companies should assign responsibility for check reconciliation to a specific team or individual and ensure dual approvals for reissuing checks.
Example Case Study
Imagine XYZ Ltd. issued a check of $2,000 to ABC Consultants on January 1st, but it remained uncashed by July 1st. The company policy deems checks older than 180 days as stale. On July 15th, the accountant makes the following journal entry:
Bank/Cash Dr $2,000 Accounts Payable Cr $2,000
This reinstates the liability. Later, if ABC Consultants requests a reissue in August, XYZ Ltd. can then issue a new check and make this entry:
Accounts Payable Dr $2,000 Bank/Cash Cr $2,000
Both transactions maintain the integrity of the financial records and reflect the true movement of cash.
Stale checks are a common accounting issue, especially in organizations that issue a large number of paper checks. By understanding the journal entry for stale checks, companies can ensure accurate financial statements and maintain proper control over their cash and liabilities. Regular reconciliations, clear policies, and proper documentation all contribute to a smooth handling of such cases. Whether reversing the entry or reissuing the check, timely action and correct accounting practices protect the company from misstatements and compliance risks.