CHAPTER 5: CASH APPLICATION, DEDUCTIONS, AND DISPUTE MANAGEMENT
A disadvantage to a traditional lockbox is the delay in applying the cash receipts. Since checks go to the lockbox directly, it usually takes a day to be notified of the receipt, so the cash is not immediately applied. However, if the bank can scan the incoming checks and post the images to a secure website, this will allow the cash application staff to access the images 24/7/365 and record the receipt in the accounting system as received – also enabling the collections staff to access check images immediately after checks arrive at the lockbox. Most large banks have this capability, though not all smaller banks do, so a company should be sure to ask before signing up for the service. CHECK PROCESSING—TRUNCATION In the 1960s, the bottom of checks started being printed with magnetic ink, allowing for character recognition (MICR) and making them machine-readable. This helped automate the sorting and clearing of paper checks. In the 1990s, some countries began to change their laws to allow the depositor’s bank to scan and image the check and use the image in the clearing process. This is known as truncation. Once imaged, the image is transmitted to the originator’s bank and the original checks are destroyed. The need to change the traditional check-clearing process in the U.S. was brought home in stark terms as a result of the events of September 11, 2001, which resulted in the grounding of all airline flights for several days. That caused a major disruption to the country’s financial transactions. Checks, like passengers, were stranded. In the days following 9/11, the Federal Reserve’s holdover became an estimated $47 billion, compared to the typical several hundred million. Federal Reserve Chairman Alan Greenspan submitted a check truncation proposal to Congress in December 2001. This proposal eventually became the Check Clearing for the 21st Century Act. CHECK 21 The Check Clearing for the 21st Century Act, commonly known as Check 21, was signed into law in October 2003, effective October 28, 2004. Check 21 created a new negotiable instrument called a substitute check or image replacement document (IRD), which has the full legal force of the original check of which it is a copy. The point of this is to allow check truncation (conversion to an electronic image) at an earlier point in the check-clearing process so that banks may process and transport checks electronically, then deliver substitute paper-copy checks to the paying banks on which the checks are drawn. Check 21 sets down the rules that allow check truncation, whereby the paper check can be imaged and that electronic check image becomes the legal check from that point onward in the clearing process. CHECK 21 APPLIED: REMOTE DATA CAPTURE (RDC)—B2B The application of Check 21 extends beyond the banks. The legislation made possible a new method of depositing checks: remote deposit capture (RDC). RDC is the process by which a check is scanned and a digital copy of the check is sent to the bank electronically following Check 21 rules.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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