BANK DEPOSITS

All businesses with direct cash receipts routinely courier them to the financial institution for deposit. Usually this is a daily process, but it need not necessarily be so. Small amounts of cash receipts can be kept locked up and deposited less frequently to reduce travel time to the bank.

Deposit Procedures. The financial institution will process each deposit as a batch of transactions using the preceded MICR deposit slip as the batch header. They use the deposit ticket to match the total of all the deposits in the batch as they are individually encoded during bank proof-of-deposit processing.

To provide backup for each batch, the bank requires a listing of each item in the batch to accompany the deposit. Many businesses use a 10-key tape of the items in the batch (usually prepared when the same batch was prepared for entry into the accounts receivable system). This approach offers the advantage of allowing the checks to be immediately deposited following mail processing. The remittances can stay behind and be batch entered as though they were cash receipts.

Often a better approach is to use the batch listing or a copy of the cash receipts journal, printed from the system, to accompany each batch of deposits to the bank. This requires waiting until each batch is balanced, and the batch listing is printed, before depositing the funds in the bank. Not only does this allow the batch listing to act as backup for the deposit, but it can avoid some of the photocopying that might be necessary if the cash receipts and remittances are immediately separated.

The financial institution uses this supporting detail to assist in identifying errors during their processing of deposits. If the bank's encoding operator is in error, then the problem is corrected immediately. If it is the depositor's error, and, for example, a cash receipt is missing from the batch, the financial institution files a separate notice to inform the depositor of the error and corrects the amount of the total deposit.

Pre-encoded Deposits. Financial institutions will generally discount per check processing charges if cash receipts submitted for deposit are already encoded by the depositor. Preencoding deposits requires special encoding and mail handling equipment. This equipment is used to encode the amount on each of the checks before submitting them for deposit. Even with this approach the financial institution still requires detail for all cash receipts in the batch and still processes the checks against a deposit slip total to verify the total deposited amount. The second example of Figure 3-4 shows some comparative cost estimates for this approach. The third line of this example estimates bank processing charges for preencoded deposits.

In addition to reduced per check charges, another advantage to this approach is that the encoding machines can double as a data entry device for the accounts receivable system. Cash receipts can be loaded from the encoding machine, directly into the system, just as if they were entered through a terminal. Preencoded deposits occur most frequently in balance forward systems where the number of checks creates a favorable aggregate savings potential. For example, a cable television service, processing 100,000 cash receipts a month, realized a savings of $.03 per check, or $3,000 per month.

NONCASH TRANSACTIONS AND ACCOUNT ADJUSTMENTS

Cash receipts are the second of three classes of transactions supported by the accounts receivable system. The third class of transactions is debit and credit memo transactions. Memo transactions are used to adjust the account balance due to exceptions such as an unearned deduction, a price dispute, returned goods, or an uncollectible amount.

Most accounts receivable systems use unique transaction codes to identify different kinds of adjustments. For example, returning damaged goods and re-turning undamaged goods may involve two different kinds of credit memos. But for the most part, these noncash adjustments are handled using the same screens and features as cash receipts and invoicing transactions. Features for batch entry, cash application, and flexible transaction dating all apply to memo transactions. Many open item systems allow debit memos, like invoices, to become open items. Cash receipts, debit memos, and credit memos may all be posted to open items on the customer's account.

There are three different ways to adjust accounts. Debit and credit memos are involved in two of these approaches:

1. Invoicing System. Adjustments can enter the system as a debit or credit memo created in the invoicing system. This may be useful, for example, in the case of returned goods where the invoicing system adjusts both the inventory balances and the customer's account with one credit memo transaction.
2. Accounts Receivable System. Adjustments can be entered into the accounts receivable system as a debit or a credit memo. For example, the collections department can authorize a credit memo adjustment to write off an uncollectible open item.
3. Cash Application Process. During cash application, the system may allow the operator to enter account adjustments as part of the cash receipt being applied. This approach is unique because these adjustments are associated with the particular cash receipt being applied and are identified using deduction reason codes.

Most systems support all three of these approaches. This provides much-needed flexibility, allowing the system to accommodate a variety of situations.

Figure 3-4 Comparative Processing Costs for Different Approaches.

		Estimated Costsa
Method of Cash Receipts Processing		Per Item	Total Annual
1 Electronic funds transfer (see Chapter 2)
Base per item processing charge		.10	10,000
1/4 time clerical staff for exceptions		.06	6,000
Media charges and service fees		.03	3,000
Total		.19	19,000
2. Retail lockbox with preceded depositsb
Allocated encoding equipment costs		.10	10,000
Labor for encoding		.01	1,000
Deposit processing		.04	4,000
¼ time clerical staff for exceptions		.06	6,000
Media charges and service fees		.03	3,000
Total		.32	32,000
3. Retail lockboxc
Base per item processing charge		.20	20,000
Encoding and deposit processingd		.06	6,000
VA time clerical staff for exceptions		.06	6,000
Media charges and service fees		.03	3,000
Total		.35	35,000
4. Commercial lockbox
Base per item processing charge		.30	30,000
Encoding and deposit processingd		.06	6,000
1/4 time clerical staff for exceptions		.06	6,000
Media charges and service fees		.03	3,000
Total		.45	45,000
5. Direct case receipts
Encoding and deposit processingd		.06	6,000
Clerical staff of two		.48	48,000
Total		.54	54,000

a Assumes 100,000 cash receipts annually.
b Company does its own encoding of cash receipts and sends preencoded deposits to the bank.
c Bank performs all encoding.
d Represents the bank's basic per item fee for processing and depositing checks.

About this article and the author:

Doug Potter is the owner of The Newport Consulting Group a professional management consulting organization that provides clients with information systems planning, selection, and implementation services. He can be reached at dpotter@newportconsulting.com or through his Web site, http://www.newportconsulting.com. Note: The contents of this article were excerpted from Mr. Potters book "Automated Accounting Systems and Procedures Handbook" Copyright 1991 by Douglas A. Potter., published by John Wiley & Sons, Inc. New York Copyright Doug Potter 2003 all rights reserved.