Automatic cash application

When a company receives a large number of customer payments every day, it can be quite difficult for the cashier to apply the receipts against open accounts receivable in a timely manner. If so, deposits may be delayed. The cash application process can be substantially compressed through the use of automatic cash application.

Automatic cash application requires that the lockbox operator use a data feed to forward to the company the magnetic ink character recognition (MICR) information from each check received at the lockbox, as well as the total payment amount. The cash application software uses a decision table to decide how to apply these payments to open accounts receivable. The automated decision process generally follows these steps:

  1. Match the bank account number shown in each check’s MICR information to the correct customer. This accesses the correct customer record of open accounts receivable.
  2. Only match payments to invoices where the payment amount exactly matches the invoice amount.
  3. Of the remaining payments, only match cash to invoices where the cash amount matches the exact amount of several invoices that have just come due for payment.
  4. Kick out all remaining payments for manual review.

The decision table can contain more sophisticated rules, such as applying cash if payment amounts do not include the freight and/or sales tax elements of an invoice. As a company examines the payments kicked out by the system, it can gradually adjust the decision table to increase the number of automatic cash applications. However, the variety of deductions taken makes it unlikely that it will ever be possible to completely automate the cash application process. Nonetheless, automatic cash application can greatly improve the speed with which cash is applied.

Once cash applications have been conducted, the software posts these payments to the cash receipts module in the company's accounting software. If the automatic cash application system is a stand-alone application, this means that the updates must be ported into the accounting software via a custom interface.

Related Courses

Lean Accounting Guidebook 
New Controller Guidebook 
Optimal Accounting for Cash