TAX BY MANISH: Four Steps to Controlling Check Receipt from Customers

Thursday, 19 July 2012

Four Steps to Controlling Check Receipt from Customers

There are some typical preconditions naturally exist in small- to mid-sized companies that result in a great deal to controlling check receipt.
Before any other conditions, firstly, cash handling has been long known as an area where serious control is always required. Loosing sight to this area could expose the company to a high degree of asset loss risk. Second, the use of paper-based check is still common. Despite the availability of sophisticated accounting system on the company side, there is still a high possibility of receiving paper-based check payments from customers which are usually not a big company. Finally, small- to mid-sized companies have limited number of staffs. So, how do you control check receipt properly? Read on…
Though many small and mid-sized companies have used low-end accounting software (such as QuickBooks, Myob Accounting, or Peachtree) to automate most of their accounting process. But the use of paper-based cash receipt entry still exists in certain degree—and left the companies in a minimum cash-control system.
If you’re the one who responsible for the cash-control, here are four steps you can take to better control check receipt from customers and minimize the check-related risks.

Step-1. Route Check Receipt to Mailroom, First

Instead of letting the paper checks directly received by the accounting staff, route the check to the mailroom, first. And here is a list of task mailroom staffs should do when receiving paper checks through mail:
Have two people open the mail (or envelope) – Once the mail arrives, the mailroom staff should open all envelopes, assign two staffs to do this task to minimize the mistakes. This is important if this control is expected to be truly effective.
Mailroom staffs prepare a “Check Receipt List” – As soon as the mail opened, the staff would need to list the checks, better yet if they have a ready-made template on hand—where they can record the checks. Other than itemizing the checks with sender names and amounts in the list, they would also need to make a photo-copy of the check for archive.
Mailroom staffs endorses checks “for deposit only” – Before submitting the check to the cashier or accounting, the mailroom staffs would need to immediately stamping checks as “for deposit only”—to prevent the attempt of cashing the check for personal use by the cashier or anybody in the accounting.
Mailroom staffs submit the check and with ‘Check Receipt List’ to cashier/accounting – Finally, the mailroom staffs make 2 copies of the list for archive and submit the original to the cashier and another copy to the accounts receivable clerk. An addition control feature could be implemented on this stage is to store the check receipt list copy in a locked cabinet in the mailroom—thereby providing evidence of initial receipt in case both the cashier and receivables clerk are in collusion and have destroyed their copies.

Note: If a company has no mailroom staff to do the task, alternatively its management can assign two admin staffs (other than accounting staff) to do the job. This is important to make the control system work as expected.

Step-2. Accounts Receivable Clerk Credit the A/R Accounts

Based on the ‘Check Receipt List’-copy received from the mailroom staff, the accounts receivable clerk then would be required to credit the accounts receivable balance—belong to specific customers, invoice numbers paid and amounts according to the check receipt list—by debiting the “Deposit” account. Here is an example of journal entry to be keyed in by the A/R clerk:
[Debit]. Deposit = xxx
[Credit]. Accounts Receivable = xxx

Step-3. Cashier/Cash Accountant Matches the “Check Received List” to Check Receipt Slips

On another desk, when receiving the physical checks and the ‘Check Receipt’ from the mailroom staff, the cashier or cash accountant would need to compare the check with the item listed on the list, line-by-line and put signature on the copy of the list that will be stored on the locked cabinet in the mailroom. And, here are the next tasks would need to be performed by the cashier:
Reconcile “check receipt list” with “deposit” ledger and printout ‘cash receipt’ – By the time of finishing with comparing physical-checks with the list, the A/R clerk should have been finished with the deposit entry, and casher is able to compare it with the ‘check receipt list’ she received from the mailroom staff. By doing so, the cashier is actually makes sure that all checks have been registered in the system correctly and is able to print ‘cash receipt’ out for file from the deposit ledger.
Save the checks in the deposit box or prepare bank deposit slip – If the cashier plan to deposit the check to the bank the next day, then she would need to temporary saves the checks in a locked deposit box that she is the only person has the access in. In the case that cashier has the chance to deposit the checks to the bank in the same day, she can go on to the next step.
Clear the deposit and prepare ‘bank deposit slips’ – Before submitting the check to the bank, cashier would need to clear the deposit account and prepare ‘bank deposit slips’ accordingly. An example of deposit clearing journal entry is as follows:
[Debit]. Cash Bank = xxx
[Credit]. Deposit = xxx
Deposit the check to the banks – Having the deposit slips are ready, the cashier then is able to submit the check to the bank with the slips. Validated bank slips are stored in cashier’s cabinet attached with the ‘cash receipt’.

Step-4. Chief Accountant Reconciles Bank Statement with Cash Ledger

Upon receipt of the monthly bank statement, the Chief Accountant should reconcile it to the cash (bank) ledger. By reconciling the bank statement with the cash ledger, it provides an independent review of both cash receipts and payable checks processed, and detects the removal of cash after it has been entered in the accounting system.
Due to involvement of various accounts in the system, this task should be performed by a management-level person—who has enough authority to access all the accounting data. Chief account, as far as I know, has the required level and the power of calling any mistakes that could be catch during the reconciliation process.

Adding More Features on the Check Receipt Control

There are many widows that company’s asset come their ways out without sufficient notice by the management. It could be made by internal bad-minded employees or bad-customers. The ‘four-steps-process’ discussed is the minimum control system one can implement to ensure check receipt from customers is properly handled. In addition, she can also incorporate some or all of the following features—to get more control degree—into the process:

Review unapplied cash ASAP – Unapplied cash is one of the windows where bad-minded employees possibly get into the attempt of removing funds from the company. When payments arrive from customers, anyone intent on removing funds from the company can apply unapplied cash to open new customer receivables and then cash the check themselves. Prevent these attempts by reviewing any unapplied cash as soon as the A/R Clerk registers check receipt. To minimize unapplied cash, you can ask the collection staff to work at once—so that cash can be applied legitimately to the correct receivables.
Perform credit investigation to any NSF checks – Check returned to customers due to not sufficient fund (NSF), is a strong evidence of a credit problem, and so should be immediately routed to you as a controller for credit investigation as well as resubmission to the bank. If that is the case, then you may need to notify the marketing and shipping folks to hold any later delivery to the same customer.
Segregate the duty of depositing refunds checks with creating supplier invoices – Another window that bad-minded employees can get into the attempt of removing funds from the company, is illegitimate payment made to suppliers. Such employees can deliberately double pay a supplier invoice, then intercept the supplier refund check and cash it. To avoid this, someone who does not deal with supplier invoices should handle depositing refund checks.

The biggest challenge in implementing prudent control system, particularly in small- to mid-sized companies are, the availability of staffs needed to segregate duties in the process. In the minimum number of staffs, one would needs to closely oversee the process of check receipt time-to-time. By doing so, s/he can catch irregularities or any signs of problem and response to it earlier or even devising better control system in the area of check receipt based on it.

TAX BY MANISH