Cash Receipts - Accounting For Deductions
This is the 7th article in a series about cash receipts processing. This material is adapted from The Automated Accounting Systems and Procedures Handbook (John Wiley, New York 1991) Chapter 3.
DEDUCTIONS
Customer-initiated deductions tend to complicate cash application. Automated system features can help process and account for deductions, in some cases allowing a deduction to be completely accounted for, without operator intervention.
Cash Discount. Cash discounts are a deduction commonly offered to the customer for prompt payment of the invoice. When a timely short payment is applied to an invoice, the system can automatically record the cash discount amount allowed for that invoice. Using information in the terms table that describes percentage and timing allowed for a cash discount, the system can use the invoice's terms code to complete this calculation. This can occur either during manual or automatic cash application.
Customers sometimes take cash discounts later than allowed by their terms. The system can automatically detect this situation and, depending on options set up in the company table or terms table, either permit the deduction or charge it back to the customer using a chargeback. As part of the chargeback, the system may produce a notice for mailing to the customer, informing them that their account is being charged for the short payment.
Anticipation. Anticipation is a credit that may be taken by customers for payment of an invoice before its due date. The amount of this credit is based on
1. The annual interest rate (usually a rate that a financial institution would charge for a commercial loan).
2. The number of days before the due date that the payment was made.
For example, a customer might compute his anticipation for an invoice of $20,000 paid seven days early by:$38.36 = $20,000 x .000274 x 7 The .000274 is a daily interest rate that approximates a 10 annual rate.
Anticipation is not commonly practiced, but when it is, the accounts receivable system may receive it via a special deduction reason code allowing separate identification and reporting. The amount of anticipation is calculated by the customer when preparing the payment.
Chargebacks. Unauthorized deductions can be charged back to the customer's account using a special transaction, a chargeback. Chargebacks can be placed on a customer account for a variety of reasons: cash discount taken but not allowed, finance charge not paid, or underpayment. System options control the use of Chargebacks so that they may be levied only on selected customers. This feature is useful to avoid possible embarrassment caused by mechanically charging back good-paying customers whose underpayment should be handled more personally with a phone call.
The chargeback is somewhat of a double sided transaction—it has no net effect on the account. One side becomes a new open item on the account. The other side stays with the cash receipt to balance out the invoice (open item) so that it may be closed. Figure 3-9 exemplifies this with an invoice of $1200 being short paid by $50. The original invoice and the $1150 cash receipt become a closed item and the $50 is charged back to the account. The chargeback notification informs the customer that his short payment is being charged back to his account.
The chargeback can be both a deterrent and a headache. If it works as it is supposed to, the customer will pay the net amount due to avoid being charged for additional expenses. It is not uncommon, however, for large customers to bully the system and ignore even these additional charges. This adds additional clutter to the customer accounts and requires extra effort to eventually write-off the unpaid Chargebacks. Because of this, Chargebacks should be used with caution, particularly with large clients.
Other Deductions. Deductions can arise for a variety of reasons in addition to those already mentioned:
Figure 3-10 Deduction Reason Code Table Listing.
| Deduction Code | Description | General
Ledger
Account | Amount |
| 10 | Earned Discount | 4380 | 13,209.3 |
| 12 | Unearned Discount | 4385 | 8,039.20 |
| 20 | Anticipation | 4700 | 290.71 |
| 30 | Allowances | 4710 | 2,409.09 |
| 40 | Freight dispute | 4810 | 33.09 |
| 50 | Storage claims | 4820 | 0.00 |
| 60 | Pilferage or Damage | 4830 | 103.81 |
| 70 | Nondelivery | 4840 | 0.00 |
| 80 | Returns | 4850 | 2,019.57 |
| 85 | Price dispute | 4860 | 159.49 |
| 90 | Underpayment | 4870 | 29.01 |
| 95 | Overpayment | 4880 | 0.00 |
| | | 26,293.3 |
- A late charge or a finance charge is not paid.
- An item on the invoice may be disputed. This can be for reasons of price dispute, dispute over paying the freight, or a dispute stemming from the quantity or quality of items received.
- A special allowance, such as an advertising allowance, may have been taken by the customer.
- The customer made an error that resulted in underpayment or overpayment.
These deductions are so specific in nature that it is generally beyond a system's needs to automatically detect and account for them. To track these deductions and apply the cash receipt, the deduction's category and amount must be entered when applying the cash receipt.
Deduction Reason Code Table. The system allows different deductions to be recorded and classified according to codes stored in the deduction reason code table. This information helps categorize and report deductions. Some systems also use this table to keep general ledger account information for distribution of amounts processed against each reason code.
Figure 3-10 shows a sample listing of this table. Detail and cumulative deduction information is useful for credit analysis, analyzing aggregate customer payment patterns and financial accounting.
| 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
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