I recently met with a company who had a business process failure that caused a bunch of duplicate payments. Luckily, the company had identified the issue, actually a couple of their suppliers had told them about the problem, and they were able to identify all of the duplicate payments from the failed business process. So they contacted all of the relevant suppliers and asked each to send a check for the duplicate payment made. They had accounts receivable process the refund checks. Sounds like a reasonable process, right???
So what do you think is causing them problems now? 1099 reporting.Several of the suppliers who the company made a duplicate payment to required a 1099 at tax time. This company generated all of their 1099’s from their accounts payable system. All of the refunds for the duplicate payments were processed in accounts receivable. Here is an example to illustrate the issue.
Vendor - ABC Sole Proprietor
Accounts Payable – Make correct initial payment for services for $100,000
Accounts Payable - Duplicate payment is made for $100,000
Accounts Receivable – Processes payment from vendor for $100,000
Reported on 1099 - $200,000
From the above example this supplier would not be happy because the federal government expects ABC Sole Proprietor to pay taxes on $200,000 not $100,000. Not the best way to endear yourself with your supplier.
I have always been a proponent for companies to properly reflect all vendor activity in their accounts payable systems including refunds for anything from duplicate payments, quality control reimbursements, rebates, etc. I would estimate that more than 50% of all companies process checks from suppliers using the business process described above, i.e. entering the check in accounts receivable and leaving no audit trail in accounts payable.
How do you process your refund checks from your suppliers? I am interested in hearing your processes and thoughts.
Karl Andersson has devoted his career to helping organizations improve their business processes. For 15 years, he has worked with multitudes of Fortune 500+ companies as the CEO of Technology Insight. Before this, he spent 10 years working in the audit and consulting sectors, which included large international projects in both Europe and Asia.
Karl brings a combination of industry expertise and real-world experience. The diversity of his clients has allowed him to understand a variety of industries, and the unique challenges that each of them face.