What are Canceled Checks?

What are Canceled Checks?

Definition

A canceled check is a check that has been paid into the payee’s account. It cannot be used to take out any more money from the payer’s account.  

What does a canceled check mean?

A company that buys raw materials from a supplier may make payment by check. When the payee receives the check, it would be endorsed and subsequently deposited into the payee’s bank account.

At this stage, one of two steps could be taken by the payee’s bank. The amount mentioned on the check could be immediately credited to the payee. Alternately, the payee’s bank may credit only part of the amount or even delay the entire credit until the check clears.

The payee’s (supplier’s) bank would send the check to the payer’s bank. The payer is the company who had bought the raw materials. The payer’s bank would transfer funds to the payee’s bank and cancel the check.

Remember that all these activities take place electronically. After a check has been canceled, it cannot be reused. A canceled check is proof of payment being made. The payer can retrieve canceled checks from the bank to prove that the payment has been made.  

Example of a canceled check

Harding & Co, a marine contractor, regularly buys supplies from Short Enterprises. On July 9, 2018, Harding & Co makes a payment of $10,000 by check to its supplier.

Short Enterprises deposits the check into its bank account at Wells Fargo. The bank provides an immediate credit in Short Enterprises’ bank account and sends the check for clearing. When Capital One, Harding & Co.’s bank receives the check, it debits its account holder’s (Harding & Co) bank account and cancels the check. It also transfers funds to Wells Fargo.

Summary

A canceled check is a check that has been cashed by the payee. It can be retrieved from the bank by the payer and maintained as a proof of payment.