CHAPTER 5: CASH APPLICATION, DEDUCTIONS, AND DISPUTE MANAGEMENT
Regardless of the reasons, failing to deposit and apply a receipt is not acceptable practice. Deposits should always be prompt, and whoever is responsible for cash applications must handle them right away, because “later” tends to never come. For those items that cannot be traced immediately to an open invoice or invoices, the payment amount can be applied to an unapplied cash account in the AR register. If a company employs an unapplied cash account, someone must have the responsibility of clearing that account daily so it doesn’t back up. Internal controls should be established and implemented to ensure that cash is applied on a daily basis, and that the amount of cash received each day matches the amount applied. Mondays are the largest processing day because of weekend mail, especially when there is a three-day holiday weekend. Cash application should work closely with the customer master file (CMF) to eliminate duplicate customers. It is very important to only have one account per customer. To understand why, consider a scenario that happens quite often. A payment is received and the cash applicator does not find what the customer is paying for on a particular account. What the cash applicator doesn’t realize is that there is a duplicate CMF record. AR will call the customer on the invoice as it ages past due. The customer will tell them it was paid via a check, causing the customer to trace the check through the bank only to find it was cashed. The AR person will then trace from the date the check was cashed to find it posted as cash-on-account on the duplicate CMF record. A lot of time and effort (which equals cost and frustration) has been expended. If this is a common scenario, it may be beneficial to add a process step that before adding COA, the cash applicator searches the CMF to see if there is in fact a duplicate CMF record. This is another example of why it is so important to build good controls into policies and procedures and for those procedures to be followed. No one wants to hear the CFO ask, “Why don’t we have time to do something right, but we have time to do it over?” Accuracy in applying cash receipts is very important — correcting a misapplied payment can take a lot of time. Someone will have to reverse the incorrect transaction and make the correct transaction. That may not sound too difficult, but if the misapplication occurred in the past, it may require that every payment since the error occurred be reversed and reapplied. In addition, if the customer is upset about the misapplications, it may decide to withhold further payments until the problems are cleared up. If this becomes a trend, it can be devastating to cash flow.
While prompt posting and accuracy are the two major objectives of cash application, accuracy is more important because of the potentially large amount of rework a misapplication can cause.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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