I have done accounting work for many years, primarily accounts payable, and there is a practice I have seen over and over through the years that causes so many headaches.
Generally speaking, I’d have to say about 15% of the time is spent tracking down this problem. And the damnedest thing is, the problem should never have existed in the first place. Except by someone’s incompetency, institutionalized.
The practice is applying payments to an account rather than to a specific invoice.
Let’s say your company receives three invoices from Joe’s Mechanical on one day.
#1 is for $20 for a widget,
#2 is $2,000 for some work done, and
#3 is for a $4,000 machine.
You send around the invoices to the people in the company who need to approve the expenditures. #3 is approved immediately and you process it. #1 is waiting for the guy to return from vacation and #2 is waiting on verification of the work done.
Meanwhile, Joe’s company gets the $4,000 check and puts it on your account.
Next day, you get another invoice from Joe’s for $1,350 for another piece of equipment. You send #4 off to the approving party.
Meanwhile, the project manager for invoice #2 calls Joe’s and tells them the task was not done and was not even ordered. Joe’s issues a $200.00 credit for that but does not send a paper credit memo, just keeps it in their system.
Working efficiently, invoice #4 is approved and paid.
Then you get a notice from Joe’s accounting department that says there was a short pay on invoice #3 and you still owe $430.00.
While most people would pull up the records and start hunting, the simplest thing to do is ask Joe’s to send you the statement of the account. Otherwise you are going to be more confused than ever trying to nail this thing down.
And here’s what the statement would show:
Once you have seen their statement, you know the confusion arose from TWO different errors:
1st – they misapplied the payments and
2nd – the internal credit memo was for $200.00 rather than $2,000.00.
This fiasco could have been easily avoided if the vendor had applied the payments properly rather than in a haphazard fashion. Also, if the credit memo had been mailed to the customer, the discrepancy on that count could have been found rather quickly.
I know how this sort of thing came about.
In the primeval days of accounting, there was no computer software for this stuff. Mainly because the only computer was the Univac in New York. The PC was not even in anyone’s daydreams (well, mostly).
Accounting was done by hand, with a pencil, on columnar pads, where every transaction was entered. And it was so much simpler to run an account on a page with the running total. It was fairly standard practice and still led to the headaches outlined above.
But then came the computer and software capable of lightening the workload by the correct assignment of payments. No longer do you have to search back through a year’s worth of invoicing to clear up these problems.
Except when people do not input the data properly – or use inflexible or archaic software.
But even in the olden days, pre-PC, this was a problem.
Still, the problem above had with Joe’s mechanical is not that much of a mind-bending problem. The solution could be found rather quickly.
But what about a vendor who sends out numerous invoices to your firm on a weekly basis?
Firms I have worked for in the past have several facilities each using a certain shipping firm and all the bills are sent to the central office. The shipper seems to be using software that has this little problem – or their personnel need to be trained a little better.
Anyway, for those of you not involved in accounting, this post will be pretty meaningless… perhaps.
Though the problem may exist in other areas of life and business as well.
I have also noticed the same sort of things in shipping departments. Some orders are shipped short, and caught up in a later shipment but shorted from that one as well.
Humans seem to have a propensity for complicating things for everyone else just to make their own job simpler.
This is called laziness.