26 Process Drafts
This chapter contains these topics:
26.1 Processing Drafts
Payment by draft is a common business practice in France. A draft is a representation of a promise to pay a debt. Its existence changes the legal nature of the underlying liabilities or assets.
Drafts are payment instruments that involve direct communication between the bank of the payer and the bank of the payee. A draft must be classified, tracked, and reported separately from other types of obligations, such as checks and transfers. Clients might require both manual and automatic draft processing. These processes consist of three to five steps, depending on the country or client requirements.
In France, drafts can be remitted on paper or electronically. When a draft is remitted to the bank, the bank charges a commission fee for processing the draft. The commission fee is subject to VAT. If the draft is discounted, the bank calculates its fee based on the actual due date. The fee for discounting is also subject to VAT. You must create manual journal entries for these VAT entries.
Invoices and vouchers that are subject to settlement by draft are distinguished from other types of transactions in the system by a special payment instrument type. You can specify a payment instrument type on the customer master or on the invoice/voucher entry screen.
26.2 Accounts Receivable Drafts
Businesses in France use the following accounts receivable drafts:
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Lettre de change
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Billet à ordre
The lettre de change is sent from the supplier to the customer and requires customer acceptance. The billet à ordre is sent from the customer directly to the supplier and does not require any acceptance.
The Accounts Receivable system provides an effective way to process drafts receivable. The following information pertains only to the flow of accounts receivable draft processing.
Figure 26-1 Accounts Receivable Drafts Process
Description of "Figure 26-1 Accounts Receivable Drafts Process"
26.2.1 Creating Invoices
A customer purchases goods or services from you. You use the Standard or Speed Invoice Entry screen to create and then post an invoice. When you post the invoice, the system debits accounts receivable and credits sales.
At this point in the process, the invoice is open. No draft exists.
The account postings and the balances in the general ledger for the journals are as follows:
26.2.2 Printing the Draft (Optional)
Either you or your customer can originate the draft. The draft shows the amount to be paid, the due date, banking information, and, possibly, information about the invoices.
If you originate the draft, you can include invoices or statements. Some customers expect one draft per invoice. Other customers expect one draft for a statement of invoices. You can either send invoices with drafts attached or send statements with drafts attached. Printing the draft has no effect on the general ledger.
26.2.3 Accepting the Draft
The draft cannot be legally enforced until your customer accepts it. After your customer accepts the draft, you enter and post the draft, whether it is manual or automatic.
For manual drafts, your customer can accept the draft by:
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Signing the draft that you originated and returning it to you
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Changing the draft that you originated (date, amount, bank, and so on), and then signing and returning it to you
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Originating, printing, signing, and sending the draft to you
For automatic (pre-authorized) drafts, the draft is considered accepted by prior agreement without a response from your customer.
At this point in the process, the system closes the invoice. The draft has been created and accepted.
The system creates a journal entry to debit drafts receivable and credit an A/R trade account. You post the journal entry.
The account postings and the balances in the general ledger for the journals are as follows:
Figure 26-6 Accepted A/R Draft Account Postings
Description of "Figure 26-6 Accepted A/R Draft Account Postings"
26.2.4 Remitting the Draft
You remit (deposit) the draft to your bank so that it can collect the funds from your customer's bank. You can remit the draft either on magnetic tape or by printing a register. When you remit the draft, the system creates a journal entry to credit drafts receivable and debit drafts remitted. You post the journal entry.
You arrange to collect funds from the draft in one of the following ways:
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Wait until the funds become available on the due date that is specified on the draft.
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Request an advance from your bank before the due date of the draft (discounting). Typically, banks charge interest when they advance funds for a draft before its due date.
Note:
You can use either the paper draft remittance program (P03570) or the Magnetic Draft Remittance (P03572) to remit drafts. When you use the Magnetic Draft Remittance program, the program generates a file (F03572) that corresponds to the French banking standards (AFB) for magnetic drafts (LCR Magnetiques).
The account postings and the balances in the general ledger for the journals are as follows:
Figure 26-8 A/R Remitted Draft Account Postings
Description of "Figure 26-8 A/R Remitted Draft Account Postings"
26.2.5 Collecting the Draft
Your bank collects the funds for the draft from the customer's bank on the due date on the draft. Your bank informs you if it cannot collect the funds. On or after the due date, both the supplier and the customer recognize the transfer of cash.
When you update the status of the draft in your records to show that it was collected, the system creates a journal entry to credit drafts remitted and debit a cash account. You post the journal entry.
The account postings and the balances in the general ledger for the journals are as follows:
Figure 26-10 Collected A/R Draft Account Postings
Description of "Figure 26-10 Collected A/R Draft Account Postings"
26.2.6 What You Should Know About
26.3 Accounts Payable Drafts
The Accounts Payable system also provides a way to process drafts. The following information pertains only to the flow of Accounts Payable draft processing.
26.3.1 Creating a Draft
To create drafts, you select the vouchers that you want to include in a payment control group for drafts. Vouchers that are subject to settlement by draft are distinguished from other types of transactions in the system by the payment instrument type D.
When you create drafts, you use the Write function in Work with Payment Groups to print the drafts. You use the Update function to:
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Change the pay status of an original voucher from # (in process) to P (paid).
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Create a matching document with a document type of P1. This matching document closes the original voucher.
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Create a new original document. The new document should have a document type of P1 with a pay status of D to indicate that the draft has been created.
When you create drafts, you can use a processing option to submit the payment batch to post. When you submit the batch to post, the system creates journal entries that debit the A/P trade account and credit the drafts payable account. The system uses AAI item PDx to identify the general ledger account to use for drafts payable.
26.3.2 Paying a Draft
When a draft has been paid by your bank and cash has been transferred, you must identify the paid draft in your system by selecting the draft for payment. When you select the draft for payment, the system closes the draft and creates a batch for posting.
The following graphic shows how the system uses the document type and document number information to group the entries that are related to the original voucher. The graphic shows one draft replacing several vouchers. Each row represents a new record in the accounts payable tables.
26.3.3 Posting Outstanding Drafts
After a draft has been paid, you post it to the general ledger. The system selects drafts with a pay status of draft selected, then generates and posts journal entries that debit drafts payable and credit the payables bank account. The system also changes the pay status of the draft to paid and generates a post report.
26.3.3.1 Writing Payments
When you write payments, the system does the following:
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Changes the "next status" of the payment group from WRT (write) to UPD (update).
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Creates and prints drafts using control information for payment groups.
26.3.3.2 Updating the A/P Ledger
When you update payments to the A/P ledger, the system creates the following documents:
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A matching document with a document type of P1, which closes the voucher.
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An original document with a document type of P1 and a pay status of D (draft accepted). This document is the draft, which replaces the original voucher.
26.3.3.3 Closing Drafts
When you know a draft has been paid, you select it so that you can then post it to the general ledger. When you select it, you change the pay status of the draft from D (draft accepted) to # (draft selected).
26.3.3.4 Posting Outstanding Drafts
After a draft has been paid, you post it to the general ledger. The system changes drafts with a pay status of # (draft selected) to P (draft paid). The system then generates and posts journal entries that debit drafts payable and credit the payables bank account, and prints a post report.
26.3.4 Example: Paying Drafts
The following chart shows how the system uses the document type and document number information to group the entries related to the original voucher. The file shows one draft replacing several vouchers. Each row represents a new record in the accounts payable tables.
Figure 26-12 Accounts Payable (Paid) Draft
Description of "Figure 26-12 Accounts Payable (Paid) Draft"