CHAPTER 5: CASH APPLICATION, DEDUCTIONS, AND DISPUTE MANAGEMENT
Short pays and deductions tend to increase when the economy tightens as customers look for every opportunity to control their cash outflow.
The most common short payments occur with shipping charges, tax, pricing, or term discrepancies (unearned discounts). Others are more complicated, involving disagreements about the goods or services, and require human intervention to resolve. Here are some other examples: Dissatisfaction with merchandise quality shipped or service received; Wrong quantity of product received or wrong hours billed; Merchandise short-shipped; Merchandise damaged; Merchandise not shipped on time; Wrong price; Promotional discounts were not given (free freight, extended terms, and discounts); Shipping problems; and Volume rebates not applied. Each type of deduction requires different process steps in order to research and resolve the discrepancy. Manual research versus having an automated process will affect the amount of time it takes to gather the documents needed to make the decision. Is the customer correct and, if not, what documentation needs to be provided so the deduction will be repaid? The latter is called a chargeback. A chargeback is a term that refers to deductions that AR thinks are invalid and are therefore recharged to the customer. If supporting documentation is not sent with the chargeback, however, the customer will most likely not make a payment. Supporting documentation could be proof of delivery, a copy of the contract stating terms and pricing, and so on. The customer should reference the debit memo number, so that when cash application receives the payment, they can properly match it to the debit memo. Even if the customer only references the original invoice number, cash application can match because the DM number contains the invoice number. In VAT countries, the payment must match the invoice, so when there is a discrepancy in the invoice, the customer will send accounts receivable a debit memo that explains the payment will be held until the discrepancies listed are corrected. For example, it may list a price discrepancy between the PO and the invoice or that an item was not received or was damaged. It is very important to react quickly to these debit memos because the full amount of the invoice is being held for payment. If the customer is correct, a credit memo for the full amount of the invoice must be issued, thereby clearing that invoice, and a new original invoice properly billing for the items must be issued. If the customer is not correct, the proof must be sent to the customer so they can release the payment. In all cases, time is of the essence when it comes to settling deductions. The time it takes to research and resolve deductions has a direct impact on (a) reporting accurate sales and receivables on financial statements, and (b) being able to collect back the invalid deduction if the customer is incorrect.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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