Reading 700 Handwritten Checks: Why Every Line Needs a Vendor
A bank statement shows a check number and an amount. That’s all. It doesn’t say who the check was written to or what it was for, and for a cash-heavy business that pays by handwritten check, that means the bank feed can categorize the transaction but can’t name it. The vendor name is what makes the P&L readable, and it has to come from the check image. There’s no other source.
We run an accounting firm, and this fall, ahead of the September 15 deadline, we did full-year cleanups for four restaurants. Between them, nearly 700 handwritten checks. Every one got read from the image, matched to the statement line, and coded with a vendor. Here’s what was in them, and why the vendor line turned out to be the whole story.
How do I categorize handwritten checks in my books?
From the image, not from the statement. The bank feed delivers “Check 4471, $842.16.” A bookkeeper working from the feed alone has two choices: leave it uncategorized, or guess. Most guess, based on the amount, and the guess becomes a line on the P&L labeled “Supplies” or “Repairs” with no vendor attached.
The check image, pulled from the bank’s portal, shows the payee, the memo line, and often a handwritten note about what it was for. Reading it takes seconds per check. Reading 700 of them takes a few hours, and it’s a few hours that changes what the P&L means.
For these four restaurants, the images turned up four things the statement never could have.
Tip payouts by check
A large share of the checks were written to employees. Not payroll, which ran through the payroll system, but separate checks for cash tips collected on cards and paid out at the end of the week. From the statement, they were checks to individuals for a few hundred dollars each, and the prior bookkeeping had coded them wherever the amount seemed to fit, mostly to vendor expense lines.
Tips paid out are labor. They belong in payroll, reported through the payroll system, with the employee’s tips on their W-2 and the payroll taxes handled correctly. Coded as vendor expense, they overstated cost of goods and understated labor all year, which made the food cost percentage look worse than it was and the labor percentage look better. Every decision the owner made about menu pricing and staffing that year was made on those two wrong numbers.
Counter checks
Some checks were written to cash, or to the owner, or to a family member, with memos like “loan” or nothing at all. On the statement, they were checks. In the prior books, they were expenses.
They were owner draws. Money taken out of the business by the person who owns it, which belongs in equity, not on the P&L. Coded as expense, they reduced the reported profit of the restaurant by the amount the owner had taken out, which meant the profit number was lower than the real one, the tax return was built on it, and the owner had no idea how much they’d actually drawn during the year. Reading the images sorted every one of them into equity, and the profit number moved by a lot.
Transfers to sibling entities
Several checks were written from one restaurant to another in the same family of entities. One location paid another’s produce bill. One lent another cash for a slow month. On the statement, these were checks to what looked like vendors. In the prior books, they were purchases.
They were intercompany transfers, and they belong in due-to/due-from accounts, booked on both sides, so each entity’s P&L shows only what it actually spent and the balance between them can be tied to zero. Coded as purchases, they inflated one restaurant’s expenses and left the other’s books with unexplained deposits. The group’s combined numbers were wrong by the total of every transfer, in both directions.
The credit nobody knew about
One of the images wasn’t a check at all. It was a returned item, a vendor credit that had been deposited and then reversed and redeposited, sitting in the statement as a pair of transactions that had been booked as two separate deposits. The images made the sequence clear: one credit, not two, and the second “deposit” was the bank correcting itself. Without the image, the books carried revenue that never existed.
That one was small in dollars. It’s in this article because it’s the kind of thing that’s only findable when someone looks at the source, and it’s the kind of thing that a lender’s analyst or a buyer’s due diligence team finds when they look, and then wonders what else is wrong.
Why does every transaction need a vendor name?
Because the P&L is only as good as its worst-labeled line. A “Supplies” line with no vendors behind it is a number that can’t be checked, questioned, or improved. A “Supplies” line made up of named vendors can be sorted, compared month to month, and read by someone who wasn’t there.
Lenders read the vendor list before the P&L. So do buyers. So does an auditor, and so does a preparer who’s trying to figure out whether the cost of goods number is real. A P&L with named lines answers their questions. A P&L with “check” on 700 lines doesn’t, and the conversation that follows is expensive.
The rule that came out of these cleanups, and that we apply to every client’s books, is simple: every coded line carries a vendor. Not most. Every one. If the transaction is a check, the vendor comes from the image. If it’s a card charge, from the merchant. If it’s a transfer, the counterparty entity. If it’s a draw, the owner. No line gets a category without a name.
What a CFO does with this number
A fractional CFO reads the vendor list before the P&L, for the same reason a lender does. Sorted by vendor, the year’s spending shows things the category totals hide: the three produce suppliers where there should be one, the repair vendor who’s been paid every month for a year, the “consultant” who’s really an employee, the family member on the vendor list. It shows concentration, which is pricing risk, and it shows the pattern of owner draws, which is the real answer to “where did the money go.”
None of that is visible from a P&L built on the bank statement alone. The vendor list is where the CFO’s questions come from, and the questions are what the advisory relationship is made of.
Where we come in
Check images are read and matched as part of every cleanup we do, and as part of every monthly close for a client who writes checks. The four restaurant cleanups this fall, with the 700 checks, finished in under ten hours of staff time combined, because the images were read in one pass and the coding followed a fixed set of rules. Every line got a vendor. If your business pays by handwritten check and your P&L has a lot of lines that just say “check,” reach out. We’ll pull the images and tell you what’s actually in there.
Frequently asked questions
How are handwritten checks categorized?
From the check image, not the bank statement, because the statement shows only a number and an amount.
Why does every line need a vendor?
The P&L is only as good as its worst-labeled line, and lenders, buyers, and auditors read the vendor list first.
How are tip payouts by check recorded?
As labor through payroll, not as vendor expenses, or food cost is overstated and labor understated all year.
