Chapter 8

Authorizing and Making

Payments

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 Contents
1 Controls over payments

2 Cheque requisition forms

3 Expenses claim forms

4 The timing and methods of payments

5 Payments by cash

6 Payments by cheque

7 Bank giro credits (credit transfers)

8 Payments by banker's draft (payable order)

9 Payments by standing order and direct debit

10 Documentation to go out with payments

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 Controls Over Payments

Controls Over Payments

• Payment Controls monitors the payments you
send and can block these in real time to
prevent fraud. Define stronger policy to
protect your operations By understanding the
patterns of payments you send over time.
• Let’s understand it with an example.

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 Controls Over Payments

Controls Over Payments

Suppose that a company buys goods costing $5,000.
Step 1 - It will receive an invoice from the supplier. This is the documentary evidence of the
reason for and amount of the payment.
Step 2 - The invoice will be approved by the purchasing director. This approval is the
authorization of the payment.
Step 3 -At some time later, the payment will be made to the supplier, probably by cheque. For a
payment of $5,000, perhaps only the finance director or managing director will be permitted to
sign the cheque, and so the authority to make the payment would be limited to these two
people.

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 Controls Over Payments

Controls Over Payments

• Every payment must be approved by an authorized
person. This person will often be a manager or supervisor
in the department that initiated the expense, but every
organization has its own system.
• Which individuals can authorize particular expenses
• The maximum amount of expenditure that an individual
can authorize

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 Controls Over Payments
When a person authorizes a payment, he or she should evidence this approval by putting a signature
or recognizable initials on the appropriate document (invoice, cheque requisition form, expenses
claim form, or similar document) and ideally also the date.
Without the signature or initials of an authorized person, the accounts department should refuse to
make the payment, and should send the document back for the approval to be properly given.

Some companies use a sticker or stamp which they put on invoices received.

INVOICE PAYMENT
APPROVED BY
• Name ..................................................................
• Dept ....................................................................
• Date ....................................................................
• Initials ..................................................................
This makes it easier later for the accounts department to check that the invoice has been properly
authorized for payment.

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 Cheque Requisition Forms

Cheque Requisition Forms

• Cheque requisition forms are used when primary
documentation such as an invoice has not been received.
Cheque requisition forms help to ensure authorization
and recording of payments.
• A cheque requisition form is simply a form requesting
that a cheque should be drawn to make a payment.
• A cheque requisition form is an internal document for use
within the business, and so there is no standard design.

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 Expenses Claim Forms

Expenses Claim Forms

• In many organizations, employees will make payments out of their own pocket for
items of business expense, and then claim back the money from their organization.
Expenses for which payments might be claimed include the following.
• Money spent by the employee on business travel
• The cost of newspapers or magazines that the employee buys for business use
• Part or all the employee's domestic telephone bill
• Petrol
• Car service and repair bills (for company cars)

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 The Timing and Methods of Payments

The Timing and Methods of

Payments
A business will use a variety of methods to make
payments. Ignoring payroll (wages and salaries) and
petty cash, the most common and convenient methods
of payment are by cheque and by automated transfer.

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 When should Payments be made and who to?

When should Payments be made and who to?

Suppliers submitting invoices will usually grant a period of credit to a customer.
(a) 'Net 30 days' on an invoice means that payment is due 30 days from the date of the
invoice.
(b) Similarly, 'net 60 days' and 'net 90 days' allow 60 and 90 days respectively from the
date of the invoice.
(c) Some suppliers specify the latest date for payment on the invoice (such as 'Payment
due by 30 November 20X7').
(d) If the invoice is not paid by the specified date, then it becomes overdue, and
reminders and telephone calls may be received from the supplier.

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 Who Decides?

Who Decides?
• Decisions about who should be paid and when are made by a senior person in the
company, perhaps the chief accountant. To help the decision-making an accounts
clerk might be required to draw up a list of unpaid invoices.
• Overdue
• Outstanding for longer than a certain period, say two months
• Miscellaneous payments not made to trade suppliers will be paid at various dates
during the month as they fall due, whereas trade bills tend to be paid at the end of
the month.

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 Methods of Payment

Methods of Payment

The methods that a business uses to make payments for goods and
services, wages and salaries, rent and rates and so on are broadly
the same as the methods of receiving payments. However, a
business is likely to use some methods of payment much more
often than others, and the following are most used.
• Cheques
• Automated transfers (especially for salaries and wages)
• Internet payments

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 Methods of Payment

Methods of Payment

Other payment methods are as follows.

• Cash
• Banker's draft
• Standing order
• Direct debit
• Company credit card or charge card
• Mail transfer and telegraphic transfer

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 Payments by Cash

Payments by Cash

• Cash payments are used for the following.

• For small payments out of petty cash, sometimes for wages
• Using cash to pay large amounts of money to suppliers ought to be very rare indeed.
• (a) Cash needs to be kept secure: it is easily stolen.
• (b) Cash can get lost in the post.
• (c) It will be difficult to keep control over cash if it is used often for making payments.
• (d) Unless a supplier issues a receipt, there will be no evidence that a cash payment has
been made. This is bad for record keeping.
• Not surprisingly, the use of cash to make large payments to suppliers is sometimes
associated with shady or dishonest dealers in backstreet or underworld businesses and may
be subject to money laundering regulations.

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 Payments by Cheque

Payments by Cheque

• The most common method of payment by businesses (excluding wages and salary
payments) is by cheque. Most companies and government agencies or departments use
computer-produced cheques.
• Cheques are for payments out of a current account at a bank. The accounts department of a
company
• will be provided with cheque books for its current account by its bank, each book containing
perhaps 50 crossed cheques.
• An individual in the accounts department will be responsible for the safekeeping of the
cheque book(s). They should be kept under lock and key, perhaps in a safe and at the very
least in a locked drawer. Cheque books, or individual cheques from a book, might be stolen
by someone who intends to use them deceptively. The person responsible for safekeeping
may also be responsible for ordering new cheque books when the old ones run out.

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 Signatures on Business Cheques

Signatures on Business Cheques

• A bank will not permit a payment by cheque from a customer's account unless it has been
properly signed.
(a) For company cheques, only certain specified individuals within the company will be
permitted to sign a cheque on behalf of the company, and the names and signatures of these
individuals must be supplied to the bank on a bank mandate form or in a bank mandate letter.
(b) In many cases, cheques above a certain value must contain two authorized signatures.
(c) Authorized signatories for company cheques are selected by the company itself, but might
consist of the chairman, all the directors and the chief accountant or financial controller.

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 Advantages and Disadvantages of using Cheques

Advantages and Disadvantages of using Cheques

Cheques are widely used in business to pay for supplies and other expenses. It is worth thinking
briefly about the advantages and disadvantages of using cheques as a method of payment.

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 Payments by Banker’s Draft (Payable Order)

Payments by Banker’s Draft (Payable Order)

A supplier might sometimes ask a customer to pay 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. Banker's drafts are not
used for small value items but might be used when a large payment is involved, such
as for the purchase of a company car.

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 Payments by Standing Order and Direct Debit

Payments by Standing Order and

Direct Debit
Direct debits are not often used for payments by businesses
but might occasionally be used for convenience.

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 Standing Orders

Standing Orders

Standing order payments might be used by a business to make regular payments of a fixed
amount.
(a) Rental payments to the landlord of a building occupied by the business.
(b) Paying insurance premiums to an insurance company.
Although the supplier (the landlord, or insurance company) might request payment by standing
order, it is up to the paying business to ask its bank to set up a standing order arrangement.

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 Standing Orders

Standing Orders

The business must specify the following to its bank.

(a) That it would like a standing order arrangement for regular payments from its account
(b) The fixed amount of each payment
(c) The frequency of each payment and the due date
(d) Banking details of the supplier to which the payments should be made
If the business subsequently needs to alter the amount of each payment, or to stop future
payments, it must send the relevant instructions to the bank in writing.

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 Direct Debits

Direct Debits

Direct debits, like standing orders, are used for regular payments. They differ from standing
orders in the following ways.
(a) It is the person who receives the payments who initiates each payment and informs the
paying bank of the amount of each payment.
(b) Payments can be for a variable amount each time, and at irregular intervals, as well as for
fixed amounts at regular intervals.
If a company decides that it wants to pay some of its bills by direct debit, it must fill in a Direct
Debit Instruction. This will be sent back to the supplier, not to the bank, and the supplier will
then decide through its own bank to set up the direct debit payments.

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 Documentation to go out with Payments

Documentation to go out with

Payments
A business should send proper explanatory documentation
with all payments to avoid confusion. Copies of the relevant
documents should be filed in such a way that the documents
are easy to retrieve

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 Documentation to go out with Payments

Documentation to go out with Payments

So far, we have concentrated in this chapter on the payment itself, but when a payment is made, it is
usual to send out another document with the payment to inform the recipient as to what the payment
is for and who it is from. This document might be any of the following.
(a) A remittance advice, either created by the customer or is part of the statement sent by the supplier
(b) An order form for payments which are sent with the order itself
(c) A copy of a pro-forma invoice where this has been provided by the supplier for payments with an
order
(d) A bank giro credit form for telephone, electricity and other similar bills
(e) A covering letter explaining what the payment is for, when other forms of documentation do not
exist

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