What is a payment?

People do hundreds of payments in their daily life. We have to pay for telephone, TV, fuel, food, accommodation etc. Payment management is a separate task people focus on everyday life. Here we are focusing about the payments done in a business entity from an accountant perspective. In business entities there is a separate division for payments too. They have to follow strict internal controls while doing the payments due to the payments function is the main money out flowing way. Statutory (External) & the internal auditors also mainly focus on this in their scope.

Evolution of Payments (History of Payments)

Payments for goods and services should have started after the Stone Age and with the barter system. Payment can be done in many ways not only by cash. In barter system you are paying by a good which satisfy the supplier. Later starting the usage of money, payments became more formal. Payments methods changed during past centuries. For many years communities used money by coins and notes, but it is transferring to virtual wallet now.

Types of payments


Cash

Most of the time people still pay by cash. But this has to be done in small payment situations such as small shops, transport, Junk foods etc. cash was used for many centuries and in various times the money made materials were changed (Paper, steel, gold).


Checks

Checks were invented in 17th century by a British banker. This is safer and convenience than the using money. It’s a printed paper with a common format and payer can write the amount, Payee and signature and easily can issue. Money will be transferred to bank to bank once check presented to bank by the payee.


Credit Card/Debit Card

Credit and debit card is a kind of a plastic card with integrated chip. Those are issuing by the financial institutions and bank to their customers. Nowadays majority is the society is using a plastic card for payments. In credit card, customer can use a limited credit facility and can repay later with some conditions. In debit card customer has to save money in the saving or deposit account, later they can be used via debit card.


Wire Transfer/Direct Payment

With the starting usage of online and mobile app facilities, customers have given the opportunity for transfer money to any account from own account in any moment. This is very easy for doing payments as well as fund transfers. Customers can avoid going to bank to do deposits and transfers.

Source: Citi Bank

Journal Entry for Payments

The main journal entry for payments is as follow;

Creditors Control Ledger              Dr

Cash/Bank Ledger                       Cr


Journal Entry for Liability creation for Payments (Invoice Recording)

Before doing a payment you have to create a liability in the ledger for received invoice. Normally there are two ways to create a liability.

If directly expensing to Profit/Loss account:

Expense Ledger                                           Dr

Creditor Control Ledger                                Cr

If already have a provision for payment (If Already expensed periodically):

Provision Ledger                              Dr

Creditor Control Ledger                    Cr


Process of Payments

Payment process can be a very lengthier process than other processes in a company, because it has to be followed many internal controls than others.

  • Receiving invoice for payment
  • Getting approval for payment (From Department Head/Finance Manager/CEO/GM)
  • Entering the invoice to system and creating the liability
  • Issuing the payment according to the pre agreed method (by Cash, Check, Card, and Wire Transfer)

 

Internal Controls

Companies keep many internal controls for payments due to their main two ways of negative impact to business due to the payments. Those are negative profit /loss account impact and the cash outflow impact. We can see that there are few common internal controls are been followed by most of the companies. Such as;

  • Services and goods are purchased only with prior approval
  • Payments are done only to formal invoices (With signature, registration number, address)
  • Invoice should be approved by the budget committee
  • Invoice should be approved by line managers or functional managers
  • Payment should be checked by separate person before putting authorized signature
  • Two managers should sign the payment
  • Payment vouchers with the all documents should keep by soft copy or hard copy for 5 to 10 years

New Trends in Payments Function

Mobil Cash

Mobile cash is a facility given by mobile service provider companies. It is kind of a digital wallet and customers can deposit and withdraw from any dedicated point or method. Also customers can pay anywhere using the mobile phone for any service and product.

Bit coin

Bit coin is the latest trending method of payments. Initially this was started for investing money and people converted their money to bit coin for investment. People can pay via bit coin in their digital wallet.

Digital Wallet

Digital wallet is using by most people for the payments in any purchases. Now anywhere you pay for the services and goods, are accepting the digital payments. This service is providing by the banks, PayPal and other global finance facility companies.

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