Accounting ManualDisbursements: Cancellation and Redrawing of Vendor ChecksUC Accounting ManualVI. Accounts Payable OperationsD-371-12 (6/1/72)***************************************************************** DISBURSEMENTS: CANCELLATION AND REDRAWING OF VENDOR CHECKS Contents Page I. Introduction 2 II. Definitions 2 III. Accounts Payable Groups 3 IV. To Cancel or To Redraw? 5 A. No Replacement Check to Be Issued 6 B. Uncashed and Unclaimed Checks 6 C. Check Correct But Other Input Needs Correcting 7 D. Special Considerations for Local Checks 7 V. Use of Clearing Account 8 VI. Stop Payments 9 VII. Notification of Reconcilement Service 9 VIII. Related Policy 9Appendix I: Vendor Check Adjustments Form 10Appendix II: Entries for Replacement of Incorrect Check 11 DISBURSEMENTS: CANCELLATION AND REDRAWING OF VENDOR CHECKSI. INTRODUCTION Detailed procedures for the cancellation or redrawing of vendor checks vary from campus to campus. This chapter states the considerations underlying these procedures and points out the choices each campus has within the University's accounts payable system.II. DEFINITIONS The following definitions apply in this chapter and should also be used in any official policy and procedure write-ups or University forms pertaining to vendor checks. Outstanding check: Any University check that has not cleared the bank and that has not been cancelled. Outstanding checks are of either of two kinds: 1) uncashed and 2) unclaimed. Uncashed check: A check which has been mailed or delivered to the payee but which remains outstanding. Unclaimed check: A check which is being held by any University office for issuance or delivery to the payee; this includes checks that have been mailed out but then returned to the University. To cancel a check: To rescind the issuance of a check by debiting cash and crediting a clearing account the outstanding check account (for explanation, see chapter C- 173-78), or the account originally charged. Vendor checks may be cancelled either by journal entry (type entry 53) or through the accounts payable system (type entry 42, group code 9). If the accounting office has the check to be cancelled in hand, it should stamp it "CANCELLED" so that it cannot be deposited or cashed (per Business and Finance Bulletin A-23, section III-H). To redraw a check: To change the name of the payee to The Regents and deposit the check in the University's bank account, with a debit to cash and a credit to any of the accounts mentioned above for cancellations. Redrawing a check is an alternative to cancelling it when the accounting office has the check in its possession. To void a check: To make a check unusable by stamping it "VOID" (BFB A-23, section III-H); checks are voided when they have been spoiled in preparation and have not been entered in the accounts payable system. Local checks are voided by accounting offices; regular checks are voided by Data Processing Centers. Replacement check: A check drawn to take the place of a cancelled or redrawn check. Paid check: Any check that has been duly charged by the bank against the University's account. Stop payment order: An order to the bank not to pay a particular check. Stop payments are issued 1) when a check is missing and a replacement check is to be issued or 2) when a check is to be cancelled for whatever reason and there is any chance it could be cashed.III. ACCOUNTS PAYABLE GROUPS In order to understand cancellations and redraws, one must be familiar with the "groups" in which invoices and Form 5's (check request forms) are submitted to DPC for processing. A complete list of group codes is given in chapter A-115-2, section III-L, but the principal codes are given below. For each group code, the types of input errors that may require cancellation or redrawing of a check are also given. Regular vendors (primarily group 2): For regular vendors, DPC maintains a file of vendor names and addresses corresponding to individual vendor numbers; the file is produced from input documents prepared by accounting offices. The vendors entered in the regular vendor file are the more common ones. When entering individual invoices, keypunchers enter only the vendor number and the group code; they do not have to enter the vendor's name. Then, in each check writing, the DPC program combines the invoices entered under each vendor number on a single check and prints out the vendor's name from the regular vendor file. Frequent error: Wrong vendor number entered by accounting or keypunch. If the vendor number entered on the invoice has never been recorded in the regular vendor file, the DPC program will delete the entry. If the number entered on the invoice for one vendor actually belongs to another vendor, DPC will prepare a check payable to the second vendor. If the second vendor is already receiving payment in the check writing in which the error occurs, his check will contain the erroneous payment as an extra item. Irregular vendors, individual entries combined on one check (group 4): For irregular vendors, DPC has no master file; from each invoice, keypunch must enter the vendor's name as well as the vendor number. In each check writing, DPC combines on one check all entries that match exactly on vendor number plus the first 13 spaces of the vendor name. Frequent errors: 1) Group 5 invoice (see below) submitted in group 4; the group 5 invoice will then be combined with any other invoices from the same vendor whereas a separate check was required for some reason. 2) Vendor name does not match exactly among several items submitted for one check writing; in this case, the accounting office will receive two or more checks where only one was needed. Usually this is not too important an error, because the checks can still be used. However, if some of the entries are credit items, the credits and the offsetting debits of any one group of items will be deleted by the DPC program if the net total is a credit because of a debit item not being properly combined in the rest of the group. The reason for the deletion is that s check cannot be written for a negative amount. In this case, the accounting office will have to cancel or redraw the check paying the uncombined debit items and resubmit the debit and credit items together. (This problem can be alleviated by the use of a multiple coding skirt covering all items to be combined; in this way, the vendor name is keypunched from only one document, so there is a minimum chance of keypunch entering the vendor name in two different ways (for example, AMERICAN-LA FRANCE and AMERICAN-LAFRANCE would net match in the DPC program; separate checks would be produced for each version).) 3) Two vendors with names that match through the first 13 positions erroneously combined on a single check (example: INTERNATIONAL BOOK, INTERNATIONS RUG). (Solutions: a) Write a local check to one of the vendors; b) submit each vendor's invoices in a separate DPC writing; c) submit one vendor's invoices in group 5; d) abbreviate to shorten name.) 4) Incorrect vendor number. The check produced will be usable but the payment will be out of proper sequence in the alphabetic vendor register. This error can be corrected after the check is written on a Vendor Check Adjustment form (form 100--see Appendix I). Irregular vendors, single check produced from each entry (primarily group 5): As with group 4, DPC does not maintain a master file for group 5. This group will not accept any credits. Frequent error: Group 5 item erroneously submitted with group 4; payment will be combined with any other items from the same vendor whereas a separate check was needed for some reason. Local checks and cancellations (group 9): Local checks are prepared by the accounting office rather than by DPC. These checks and all check cancellations are submitted to DPC in group 9, which is the only group from which DPC does not produce checks.IV. TO CANCEL OR TO REDRAW? There are three circumstances that may require the cancellation or redrawing of a check: 1) Input error on DPC-produced checks, which can be due to either coding error in accounting or a keypunch error. This type of error is discussed in section III above. 2) Check not needed because it was requested in error or because of a changed situation. This can apply to local checks as well as DPC checks. Examples would be check prepared for a duplicate vendor invoice or a scholarship check prepared for a student who withdraws. 3) Check never cashed. Sometimes the payee simply does not cash his check. In this case, the check entry is cancelled or redrawn as specified in chapter C-173-78, Cash: Unclaimed and Uncashed Checks. When a transaction must be reversed for any of the above reasons, the accounting office must decide whether to cancel the check or redraw it. In many situations, either method is equally acceptable, and the practice on this varies from campus to campus. Accounting offices should consider the following in the development of their procedures: A. NO REPLACEMENT CHECK TO BE ISSUED In this case, the choice between cancellation and redrawing is influenced by the tax code. Tax code 0: If the original check is tax coded 0 (i.e., no special tax considerations), it may be either cancelled or, if the check is in hand, redrawn, whichever the accounting office finds more convenient. Tax code 1, 3, or 4: If the original check is tax coded 1, 3, or 4 (use tax accrued on original payment), it may be easier to cancel the check than to redraw it. If it is cancelled, the use tax accrual can be coded on the cancellation form and will be reversed automatically by the accounts payable system, whereas if it is redrawn, a separate entry must be made on the redeposit form (type entry 3X), as a journal entry (type entry 53), or on a form 100 (type entry 42) to reverse the original tax accrual. Tax code 2 or 5 through 9: If the original check is tax coded 2 or 5 through 9 (payment reportable to the Internal Revenue Service), it may also be easier to cancel the check, since the data used by DPC to prepare the tax reporting forms (W-2, 1099, etc.) is accumulated in the accounts payable system and therefore must be reversed out of this system. If the check is cancelled, the original charge and the tax reporting data can be coded on the cancellation form and reversed out of the accounts payable system in a single entry. If the check is redrawn, the original charge is reversed out by a cash received entry, but an additional pair for entries must still be made on a form 100 to reverse out the IRS tax code from the accounts payable system. (The accounting office could also pull the IRS from manually after it had been prepared by DPC at year end; this would require manual records of forms to be pulled.) B. UNCASHED AND UNCLAIMED CHECKS For the purposes of preparing tax reporting forms, accounting offices should consider uncashed and unclaimed checks to have been received and cashed by the payee. Uncashed checks should be cancelled by journal entry or on an accounts payable cancellation form tax coded 0 (regardless of the original tax code) so as not to remove the tax reporting data from the DPC accounts payable file; unclaimed checks may be similarly cancelled or may be redrawn. The reason for this tax reporting is that the payee has an indefinite claim on the funds remitted to him (see chapter C-173-78, section VII), and the University has no way of knowing when he might claim these funds. The issuance of a tax reporting form might indeed remind the payee that the University owes him money that he has not claimed. C. CHECK CORRECT BUT OTHER INPUT NEEDS CORRECTING If there is a coding error on a DPC check entry, but if the check itself is for the right amount and to the right payee, it should be used. The remaining coding--e.g., tax coding, vendor coding, account coding, taxpayer ID number, or any item but the amount--can be corrected on a form 100. D. SPECIAL CONSIDERATIONS FOR LOCAL CHECKS If the accounting office makes an error in preparing a local check, it should void the check (as opposed to cancelling or redrawing it) as long as it has not submitted the check entry to DPC. Once the Check has been entered by DPC, it must be cancelled or redrawn like a DPC produced check.V. USE OF CLEARING ACCOUNT In deciding when to use a clearing account for drawing replacement checks, the accounting office should consider the following: If a replacement check is to be issued, the accounting office can clear the cancellation or redraw either through the account originally charged or through a clearing account. If a check to be replaced has been charged to a number of different accounts and if all the charges were correct, as in the case of a lost check, a clearing account should be used (see Appendix II for sample entries). By using a clearing account, the accounting office can cancel the original check and write the replacement check with just one line of coding for each check as opposed to one line for each account originally charged (however, some manual adjustment of the check stub will be required). Furthermore, the entry or entries to the accounts originally charged are not disturbed. If the check has been charged to a number of different accounts, and if only part of the charges were correct (as in the case of an incorrect amount on one line of a DPC-produced check), the clearing account may be used to clear the correct items of coding. The incorrect items must be cleared through the account originally charged in order that the original entry will be corrected in the Ledger. One disadvantage of using a clearing account is that the department whose expenditure account was originally charged will not know the number of the replacement check. If the department inquires about the check, the accounting office will first have to locate the original voucher to find the number of the replacement check (this information should be written on the voucher of the original check). Therefore, if only one or two lines of correct coding have to be reversed, the accounting office may wish to clear the cancellation or redraw through the account originally charged rather than through the clearing account.VI. STOP PAYMENTS Stop payment requests are normally handled by the accounting office section that cancels or redraws checks. The accounting office should telephone the stop payment request to the bank if a check is reported stolen or if there is otherwise some urgency; otherwise the check could be cashed before the notice got to the bank. If there is no particular urgency, a telephone call is not necessary. In any case, a written stop payment request must always be sent as a binding, official notice to the bank. If a replacement check is to be issued, some campuses require a written verification of stop payment from the bank before issuing the replacement, while others will rely on a telephone confirmation. The practice in this matter depends primarily on the accounting office's relations with the bank, the bank's reliability, and to some extent on the urgency of issuing a particular replacement check. Some banks have a standard form on which stop payment requests must be submitted. At the campuses where the bank does not have such a form, the accounting offices have all developed a form letter for requesting stop payments. Some accounting offices use a multipart form that serves as a stop payment request, a DPC cancellation form, and a cancellation form for the bank reconcilement service.VII. NOTIFICATION OF RECONCILEMENT SERVICE Each campus has contracted with its bank to assist it with the bank reconciliation (except that Davis has a separate account for local checks that is reconciled manually). Under these agreements, the reconcilement services, which are separate from the banks' operating divisions, receive magnetic tapes from DPC (or typed lists, in the case of local checks) recording check numbers and the amount of each check issued. The reconcilement service removes paid checks from the outstanding list and prints out a monthly list of outstanding checks from the accounting office. To remove cancelled checks from the outstanding list, the accounting office must periodically send a list of these to the reconcilement service.VIII.RELATED POLICY Accounting Manual chapter C-173-78: Cash: Unclaimed and Uncashed Checks______________________________Historical note: Original Accounting Manual chapter published6/1/72. Analyst: Kim Cranney.**********************************************************************************************************************************Appendix I: Vendor Check Adjustments Form C H A R T -- not available on Gopher**********************************************************************************************************************************APPENDIX II: ENTRIES FOR REPLACEMENT OF INCORRECT CHECKThe following entries illustrate the use of a clearing account inthe replacement of an incorrect check. The check is payingseveral invoices; three of the entries are correct and one isincorrect.1) Original entries: Assume the following invoices were submitted to DPC for payment in one check writing and were entered as follows:Type Payee (not key- Group Vendor Tax Amountentry Account punched--grp. 2) code no. code Debit/Credit 42 Exp. #1 Acme Scientific 2 12324 0 32.00 42 Exp. #2 Acme Scientific 2 12324 0 27.00 42 Exp. #3 Acme Scientific 2 12324 0 13.00 (total) (72.00) 42 Exp. #4 Ace Supply Co. 2 12324 0 19.84 42 Cash (vendor revolving fund) 91.84 Due to a coding error, Ace Supply's invoice is assigned Acme Scientific's vendor number. Since all four invoices are submitted in group 2, regular vendors, DPC generates a check from vendor number 12324 payable to Acme Scientific for $91.84 (72.00 + 19.84).2) Cancellation or redraw entries: The accounting office finds the incorrect check when they are preparing the checks for mailing. To correct the error, they cancel the incorrect check or redraw it to The Regents (see section IV above for explanation). For a redraw the entry would be as follows (cancellation entry would be similar but type entry 42 would be used):Type Amount entry Account Description Debit/Credit 32 Balance sheet clearing Acme Scientific 72.00 32 Expense account #4 Acme Scientific 19.84 32 Cash (campus depository) Receipts of X/XX/71 91.84 The Acme Scientific entries are cleared through the clearing account, since they are correct. By using the clearing account, the accounting office combines three lines of coding into one and avoids unnecessary entries in expense accounts #1, 2, and 3. The Ace Supply invoice is cleared back through expense account #4 in order to offset the original check entry, which will appear incorrectly in the Ledger as Acme Scientific.3) Replacement check entries: To replace the incorrect check, the accounting office resubmits the vendor invoices to DPC in group 2 (or prepares local checks, group 9). The Acme Scientific invoices are attached to a Form 5 coded with the balance sheet clearing account. The Ace Supply invoice can be resubmitted in its original form (with the vendor number corrected), since the cancellation of this invoice was cleared through the original expense account. Since the use of the balance sheet clearing account requires the preparation of a Form 5, the accounting office may prefer to clear the cancellation entries through the original expense account. In deciding whether to use the original expense account or the clearing account, the accounting office should consider the number of entries involved in the cancellation. It should balance its own effort of preparing a covering Form 5 and manually adjusting the replacement check stub against keypunch's effort of making a number of entries two times (once for cancellation, once for redraw). Coding for the clearing account method is as follows:Type Group Vendor Tax Amount entry Account Payee code no. code Debit/Credit 42 Balance Sheet Acme 2 12324 0 72.00 clearing house Scientific 42 Exp. acct. #4 Ace Supply 2 12234 01 9.84 Company 42 Cash (vendor revolving fund) 91.84 ---------------------------------------------------------------- At the end of the month, expense account #4 and the balance sheet clearing account appear as follows: Expense Account #4Entryno. (from Type above) Description entry Amount 2) Acme Scientific 32 19.84- 1) Acme Scientific 42 19.84 3) Ace Supply 42 19.84 Balance Sheet Clearing Account 2) Acme Scientific 32 72.00- 3) Acme Scientific 42 72.00Back to Accounting Manual Table of Contents