Reviewed by Sep 30, 2020| Updated on
How many days did it take for a cheque you deposited at your bank to clear? A day if it was within the same bank or would have taken at the most three to four days if it was between different banks, right?
To understand the term uncollected funds, we need to know the process of how a cheque is cleared between banks. Ideally, there are four parties to the transaction where a drawer writes a cheque in the name of drawee. It also involves their banks.
When the drawee deposits the cheque with his bank, his bank (also known as drawee's bank) will approach the drawer's bank to get the cheque cleared. The drawer's bank does a status check on a sufficient balance of drawer to honour the cheque.
If enough funds are available, the drawer's bank pays the requisite cheque amount to the drawee's bank. Till this time, the drawee’s account would not reflect the increased balance due to the cheque deposit. Such a difference is called as 'uncollected funds' shortly denoted as 'UCF'or 'UF'. Once confirmed, the drawee's bank deposits the account of drawee with the cheque amount.
The uncollected fund is the bank deposit amount that comes from cheques that are yet to be cleared by the bank from which the cheques are drawn. Accordingly, uncollected funds are sums of money that the bank needs to reconcile. It is done prior to releasing the funds to the depositor. The drawee cannot access the 'uncollected funds' until the cheque clears.
Uncollected funds are essential to be understood by businesses to enable proper operations and effective fund management. Ideally, companies will have many vendors whom they must pay to within the given credit period.
Also, they have customers or clients from whom they receive payments. Accounts payable and receivable management holds prime importance in an organisation to effectively manage working capital. The payments are made and received by cheque in most of the cases.
There can be situations where organisations hold back or try pushing payments to their vendor on anticipating a cheque from the client. Consequently, the working capital must not get affected by any unplanned uncollected funds leading to blockage of funds for the usual business operations.
There is a difference between an insufficient fund and an uncollected fund. The latter implies a pending deposit, whereas the former will not show a deposit pending. So you cannot honour cheque against an insufficient fund.
Accordingly, a cheque written on the insufficient fund will result in cheque bounce that is a punishable offence in India. It leads to imprisonment, which may extend to two years. Alternatively, it can attract a fine of up to twice the amount of the cheque or/and imprisonment.
It might be challenging to identify uncollected fund, especially when banks do not mention it in your account statement. It is computed as the difference between total balance and the available balance of a savings bank or current account.
Periodic preparation of bank reconciliation statement is advised for companies dealing with uncollected funds.