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