If your company is not based in the United States (or even if they are!) there are business mysteries behind banking and taxation that don’t exist in many other places and sometimes don’t seem to make a lot of sense. A lot of those requirements originate from state and federal level regulations. This paper checks blog series will uncover what those mysteries are and how to understand them as systems that can be easily managed with Dynamics NAV and Dynamics 365 Business Central.
What does the paper check process look like?
If you’ve never witnessed paper-based check business processes before, here it what it typically looks like. Please note that most of these processes are not best practice and can be improved but, are very frequently used in many US-based companies today.
Sending Payments to Vendors
Paper invoices are received from vendors, routed for approvals, coded to the general ledger, entered and posted in the ERP system, and filed, where they can be matched with a paper check later when it is printed.
If the paper invoices are related to inventory purchases, they may also be matched with a copy of the original purchase order as well as a paper packing slip from the warehouse as proof of receipt of the product. This satisfies the accounting concept of “three-way-match”, ensuring that purchase order, proof of receipt, and invoice all agree for total quantity and total cost, and is a primary accounting control. These three documents are sometimes called a voucher packet.
Periodically, the company will process a check run. This can sometimes be as little as monthly or as frequently as a few times a week. The purpose of the check run is to pay vendors in time to honor payment terms with the vendors, including paying in enough time to take discounts when applicable. Depending on the volume of payments to be made and delays in routing for approvals, it is not unusual to take a half or full day to accomplish.
Typical process flow of a weekly check run
- The accounts payable person runs a copy of the aged accounts payable to be reviewed and approved by a manager. The aging includes all payments due from “now” until “a week from now”. Depending on the risk tolerance and cash position of the company, they may or may not choose to pay ahead to avoid paying anything late.
- The manager reviews the payments to be made and approves or rejects any individual invoices. They may sign a copy of the aging to indicate approval.
- The accounts payable person uses the vendor payment journal inside of the ERP system to pull forward payment suggestions and adjusts them to match what the manager has approved.
- Using the payment journal, they print the checks onto some type of check stock.
- Using the payment journal, they do a reprint of the checks onto plain paper.
- They then pull the voucher packets from the unpaid file and match the plain paper copy of the check to the packet, stapling the check copy to the front of the voucher packet.
- They deliver the stack of voucher packets and the stack of printed checks on check stock to a manager in the company, who reviews again and manually sign the checks with an ink pen.
- The accounts payable person folds the paper checks into thirds and puts into an envelope with a window in it which aligns with the vendor’s printed address on the check. They may also add supporting documentation or payment stubs they had in the unpaid file to the envelope before sending out to be mailed.
- The accounts payable person then files the voucher packets into a paper filing system where they can be pulled later for research or audit purposes.
- The accounts payable person may also log onto their banking website to load a file with information about the date, amount, check number, vendor name, and vendor address for each paper check issued. This system is called positive pay and is a fraud prevention method that restricts the ability to cash a check to only checks which match the information given when they are deposited to the vendor’s bank and cleared against the company’s bank.
- As a last step, the accounts payable person will post the checks in the system to record the payments made and to apply against the invoices and credit memos paid.
Receiving Payments from Customers
To fully understand the full cycle of the paper checks process, we also need to know what happens on the other side, when the vendor receives checks, often called the daily deposit.
Typical process flow of a daily deposit
- The vendor receives a group of paper checks in the mail. If they have a mail room, they may have some type of logging system and may separate who receives the mail, who opens the mail, and who processes the deposit as protection from internal fraud.
- The employee who processes the deposit will total up all the checks received and note the total amount. They will likely separate the remittance information received in the envelope or tear off the perforated stubs to be used later.
- The employee will also make photocopies of the checks.
- The deposit will be given to an employee who physically goes to the bank to give them the stack of checks to be deposited. The bank gives them a deposit receipt.
- The accounts receivable person will match the deposit receipt with the photocopies of the checks and the remittance information. This deposit packet is referred to when recording the information about the payments received in the system.
- Using the packet created, the accounts receivable person records the deposit electronically in the ERP system, creating a total deposit that matches the total deposit receipt from the bank, and applying the individual payments to the related invoices and credit memos listed on the check remittance information.
- The packet is then filed into a paper filing system where they can be pulled later for research or audit purposes.
As you can see, these processes are highly manual and involve multiple approvals to accomplish. Each individual invoice may be “touched” over twenty times from beginning to end.
If you’d like some help with de-mystifying business processes and correct system setup related to US-based accounting practices, please get in contact with us to discuss how New View Strategies can help. We have specialists with deep accounting expertise in using Dynamics NAV and Dynamics 365 Business Central who can move quickly through the requirements for your company and establish clear and accurate processes to manage these complex business needs.
Looking for more topics related to US-based accounting? Check out the rest of our related blogs at the links below.
Why is the U.S. still using paper checks and what to do about it (Part 1 of 3)
Why is the U.S. still using paper checks and what to do about it (Part 2 of 3)
Why is the U.S. still using paper checks and what to do about it (Part 3 of 3)
The good, the bad, and the ugly side of US bank reconciliations
Pay me now or pay me later: managing 1099s throughout the year
What’s wrong with U.S. sales tax and how to make it right with your ERP system
What is South Dakota vs. Wayfair and why should companies who sell online care?
O Canada! GST, HST, GIFI and other three- and four-letter words related to Canadian taxes