CHAPTER 5: CASH APPLICATION, DEDUCTIONS, AND DISPUTE MANAGEMENT
5.4 Cash Application
Cash application, or payment processing, is the process by which companies match customer payments with the amounts due from their customers—either manually or through an automated computer program. The billing department provides information on what is due from the customer. All invoices and credits created by the billing department are listed in the AR system under each customer’s account. This appears to be pretty straightforward—when a payment comes in, look at outstanding invoices to determine what the payment is for and apply the receipt to that particular invoice. It is never that simple in real life, however. Payment amounts do not match invoice amounts, the payment is often for multiple invoices but open invoices do not add up to the check total, several payments are received from the same company at one time, and there could be a credit memo. There could also be a problem with the invoice, so that the customer short-paid the invoice. All of these issues make it very challenging to correctly apply cash receipts. Whether a paper check is manually reviewed and deposited, or an auto-cash function is used in which cash application is automated based on specific algorithms that are provided, the process is very similar. Either way, it is important from both an accounting and legal perspective to apply payments on a timely basis. It is imperative to get all checks into the bank right away, even if you don’t know what they are for. These are posted as “cash on account” (COA). However, once a check is in the bank, there is the temptation to move on to something else and plan to get back to the cash application later. Such a delay can lead to problems, such as collection calls being placed to customers on invoices that have been paid, and even faulty numbers in financial reporting (discussed in detail below). When a payment comes in, the cash application person needs to quickly and methodically review the customer’s outstanding invoices to figure out how to apply that amount to the customer’s account. If the customer references the invoice, that is the best way to match the payment. If the invoice or amounts don’t match and a guess is rendered, it can cause a major reconciliation challenge later. It is best to contact the customer to get the exact details, and take the time to let them know what information could be provided next time to be able to process their payment accurately. A collections specialist sometimes calls a customer about an overdue account, only to be told that the check was already sent. Upon further investigation, the collections staff finds that the errant check has been sitting in the cash application area and has not been applied to the customer’s account. Reasons given for not applying the payment include not having enough time, not knowing what the payment is intended to pay for, needing to call the customer for explanation, or because unexplained deductions on the payment require further investigation. Whatever the reason, calling a customer about an invoice they have already paid is a major cause of customer dissatisfaction.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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