Writing a post-dated check is a common business practice that allows a corporation to show a commercial partner, such as a lender or a supplier, that it intends to pay a certain amount at a given point in time. Post-dated checks are pivotal elements in some business activities, such as export and import, because they guarantee payments to commercial partners.
What is a Post-dated Check?
In advance of a payment, some businesses issue a post-dated check, meaning they promise to make a payment in the future. A post-dated check is a negotiable instrument that allows a party to a contract (for example, a customer or borrower) to indicate to the other party (supplier or lender) its promise to pay at a given date.
For example, suppose a department store wants to purchase $1 million worth of merchandise from a major supplier. The store's accounting manager notes that cash available at the bank is $325,000. He may issue a post-dated check negotiable within a month because he expects customers to pay $2.5 million within 15 days.
Significance of Post-dated Checks
Post-dated checks play a significant role in modern economies. Similar to credit cards and bank letters of acceptance, they help an individual or a company receive goods or services and pay for them at a later date. This business practice is important because even profitable companies have liquidity problems resulting from customers' delayed payments. As an illustration, a company that expects a customer payment of $200,000 in 10 days may issue a post-dated check negotiable in two weeks.
Post-dated Checks and Accounting Procedures
In order to keep balanced books, businesses keep detailed records of both revenue and expenses. According to to the accrual basis of accounting and generally accepted accounting principles (GAAP), all income is recorded as it is incurred, including a post dated check (pdc check). This means that the check cannot be recorded as income or expenses until the date listed on the check, although you may list a note about it in your books so that you know the transaction will occur in the future.
This can sometimes feel confusing because your accountant might record promised revenue from a contract as income, yet not record a pdc check until the actual date listed on the check. This procedure is to ensure proper cash flow for your business' ongoing expenses.
An Accounting Example
Let's say a contractor receives two checks today for a large citywide development project. The first check is for $500,000 and is dated for today, while the second check is for $750,000 and is a pdc check dated for 60 days from now, the expected date of project completion.
The first check is recorded as revenue, while the second check is set aside by you or the bank until the date written on the check, when it can be deposited and counted as revenue. If you record it prior to this point, you run the risk of spending money you do not have and ending up in the red. This can be especially risky if the payer backs out or defaults on the contract.
Early Deposit of Post-dated Checks
In some states, a bank can technically honor a post-dated check, meaning it can actually be deposited right away. However, it is considered more ethical to wait until the promised date, and it certainly makes for better client relationships.
Another consideration with early deposit of post-dated checks is when your company is the one issuing the check. It could be a mess if those funds come out early, so consider other methods of payment, such as a scheduled payment through your business debit card that will not be automatically withdrawn until the date specified.
- check and pen in close up image by Alexey Klementiev from Fotolia.com