chapter 9 - authorizing and making payments
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CHAPTER 9Authorizing and making payments
Contents
Controls over payments Cheque requisition forms Expenses claim forms The timing and methods of payments Payments by cash Payments by cheque Bank Giro credits (credit transfers) Payments by banker's draft (payable order) Payments by standing order and direct debit Documentation to go out with payments
Controls over payments
Suppose that a company buys goods costing $5,000.
1. Invoice from the supplier: reason for and amount of the payment
2. Authorization of the payment: by the purchasing director
3. Payment made to the supplier: For a payment of $5,000, perhaps only the finance director or managing director will be permitted
Authorization - Illustration
Cheque requisition forms
A form requesting that a cheque should be drawn to make a payment
E.g.: The advertising manager
of ABC wants to put an advertisement into the local weekly newspaper. The newspaper wants payment of $470 ($400 + sales tax at 17½%) in advance, and has sent a fax letter requesting this amount. A receipt will be sent later with confirmation that the advertisement has been inserted and paid for.
The advertising manager will fill in a cheque requisition form.
Expenses claim forms
Employees make payments by their own pocket and then claim back
Proof should be given of the existence and the amount of the expense (attaching receipts, invoices)
Insufficient supporting evidence? Company may refuse to reimburse the
expense.
The timing of payments
Things to consider? Credit terms Discounts
Senior person List of unpaid
invoices Overdue Outstanding Soon due to be
paid.
When and whom? Who decides and how?
Methods of payment
Cheques Automated transfers
(especially for salaries and wages)
Internet payments
Cash Banker's draft Standing order Direct debit Company credit card or
charge card Mail transfer and
telegraphic transfer Internet payments
Commonly used Other
Payments by cash
For small payments out of petty cash Sometimes for wages Pay large amounts? Not recommended
Rare Secure Dishonest dealers in backstreet or
underworld businesses
Payments by cheque
Signatures on business cheques: Only certain specified individuals With names and signatures supplied to the
bank on a bank mandate form Cheques above a certain value must
contain two authorized signatures Might consist of the chairman, all the
directors and the chief accountant or financial controller
Payments by cheque
Advantage Disadvantage
Procedures for preparing chequesStep 1 Prepare list of paymentsStep 2 Payments authorised, sufficient
funds availableStep 3 Check invoices to be paidStep 4 Prepare the cheques Step 5 Attach invoice to cheque, signStep 6 Mark invoice PAIDStep 7 Send cheque off to payee with
remittance advice
Examine the cheque
Lost cheques
Step 1 Telephone your bank saying that you want the cheque to be stopped.
Step 2 Confirm this instruction in writing.
Bank giro credits
Filling in a bank giro credit transfer form and handing this together with the payment (cheque or cash) over the counter at a bank Telephone companies Electricity companies Water companies
Payments by banker's draft
Unlike company cheques, a banker‘s draft cannot be stopped or cancelled after it has been issued
And so when a supplier receives the draft, payment is guaranteed
Example: payment by banker's draft
Suppose that one of your directors wants to buy a car from Fittipaldi Motors. The cost will be $33,334.45.Step 1 Prepare an application for a banker's draftStep 2 Signatures (probably two) of authorised
officials requiredStep 3 The form be sent to the bankStep 4 The bank will return the form to the company,
together with the draftStep 5 The form should be signed to acknowledge
receipt of the draft and then sent back to the bank.
Step 6 The draft will then be sent or taken to the car supplier, who will release the car to the company.
Standing orders
To make regular payments of a fixed amount
Arranged by a Standing Order Mandates
Direct debits
Like standing orders, are used for regular payments
the person who receives the payments who initiates each payment
Payments can be for a variable amount each time, and at irregular intervals
Similar Difference
QuestionLibra has to make the following payments.
(a) $6.29 for office cleaning materials bought from a nearby supermarket.
(b) $231.40 monthly, which represents hire purchase instalments on a new van. The
payments are due to Marsh Finance over a period of 36 months.
(c) $534.21 to Southern Electric for the most recent quarter's electricity and standing
charge. A bank giro credit form/payment counterfoil is attached to the bill. There is
no direct debiting mandate currently in force.
(d) $161.50 monthly for ten months, representing the business local taxes payable to
Clapperton District Authority, which operates a direct debiting system.
(e) $186.60 to Renton Hire for a week's hire of a car on company business by the Sales
Director from Edinburgh Airport. The Sales Director must pay on the spot, and does
not wish to use a personal cheque or cash.
(f) $23,425.00 to Selham Motors for a new car to be used by the Finance Director.
Selham Motors will not accept one of the company's cheques in payment, since the
Finance Director wishes to collect the vehicle immediately upon delivering the
payment in person and Selham Motors is concerned that such a cheque might be
dishonoured.
Solution
(a) Cash(b) Standing order: regular fixed payments, ensure
payments made on the due dates(c) By cheque at the bank, accompanied by the bill and
completed bank giro credit form. The bank clerk will stamp the bill as evidence that the payment was made
(d) Direct debit mandate: Allow the Authority to debit the amounts due direct from Libra's bank account on the due dates. The Authority must inform Libra in advance
(e) Credit card or charge card(f) Banker's draft: cannot be stopped or cancelled once it is
issued, likely to be accepted by Selham Motors
Documentation to go out with payments
A remittance advice: Created by the customer Part of the statement sent by the supplier
A copy of a pro-forma invoice where this has been provided by the supplier for payments with an order
A bank giro credit form for telephone, electricity and other similar bills
A covering letter explaining what the payment is for, when other forms of documentation do not exist
Quiz
1 What are the three main steps in applying controls over payments?
2 When might documentary evidence not be available for a payment?
3 What is a cheque requisition form?4 What is an expenses claim form used for and by whom?5 Which methods of payment are most commonly used by
businesses?6 Should cash be sent by post?7 What should you do to stop a cheque?8 What is the main difference between a standing order and a
direct debit?9 What is the document most usually sent with a payment by a
business?
Answer
1 Obtaining documentary evidence, authorisation of payments, restricting authority to make payments.
2 Invoice not yet received or there will be no invoice or receipt3 An internal document requesting that a cheque be drawn for
payment.4 Employees will use an expenses claim form for reimbursement5 Cheques and automated transfer are the most common.6 No. It might get lost and there would be no proof7 Telephone the bank to stop and then confirm the instruction in
writing8 Standing orders are always for the same amount whereas
direct debit can be for a different amount each time it is paid.9 A remittance advice is usually sent with a payment.
QB 17
A cheque requisition form isA A form requesting that a cheque should be
drawn to make paymentB A list of cheques issued on a particular dayC A request for cheque payment authorisation
when amounts payable are over a certain limitD A form requesting payment by cheque when the
supporting documentary evidence is missing
Answer: A