Understanding the Draft Life Cycle

Draft Creation

You create a draft using the Draft Request page or one of the two online entry pages (Draft Entry and Draft Mass Entry). The page that you use depends on whether you are creating a customer- or supplier-initiated draft. At this point in the draft life cycle, the draft enters the PeopleSoft Receivables system. You can also load a kijitsu draft (from Japan) into the system electronically by using an EFT file. The status of a draft that you create is either Identified or Pending Acceptance.

Draft Approval

After you apply items to the draft, you approve it using a draft worksheet or a draft approval worksheet. If the draft is preapproved, the system automatically approves the draft when you create it. The status of an approved draft is Accepted.

Draft Remittance

You send the draft to the bank to arrange for collection of the monies owed. You use the draft remittance worksheet to perform this task. The monies are collected at either the due date or the discount date, based on your specifications. If you specify that you want to collect the funds at the discount date, the bank normally charges a fee and interest. This effectively arranges for a short-term loan on the basis of the guaranteed future payment. The status of a remitted draft is Remitted.

Draft Discount Date

When the draft reaches its discount date, the bank places the funds in your account. If you discount a draft, the Receivables Update process creates accounting entries on the discount date. If a draft is discounted with recourse, the system automatically creates the appropriate liability accounting entries to record your financial exposure. These entries are necessary because the bank reserves the right to take the money back from you if your customer (issuer) fails to pay.

The status of the draft becomes C (Complete) unless you discounted the draft with recourse. If you discount a draft with recourse, the draft status changes to M (Discounted) on the discount date or when you reconcile the draft on a bank statement. The draft status becomes Complete on the due date.

Draft Due Date

When a nondiscounted draft comes due (reaches its due date or maturity date), the supplier's bank and the customer's bank process the exchange of funds. To accommodate this exchange, the Receivables Update process creates the accounting entries that are necessary to record the expected receipts. The bank statement records the actual funds when they are deposited in your bank account.

If you use cash clearing accounting and you have identified the bank account as a cash clearing account, the Receivables Update process transfers the amount from the cash clearing account to the cash account.

The status of the draft becomes Complete.

Bank Statement Reconciliation

When you receive the bank statement, you have the option to use the bank reconciliation feature to mark the drafts as reconciled. You can do this manually, or you can reconcile it automatically using the automatic Bank Reconciliation Application Engine process (BNK_RECON). The system records the funds received for each draft on the bank statement. The reconciliation module provides a manual way to match the amount of the draft received with the amount that was submitted to the bank.

When you reconcile a draft on a bank statement, the status of the draft remains Complete, but the Receivables Update process identifies the draft as reconciled by changing the RECON_PROCESSED field to Y. The Receivables Update process also generates the appropriate accounting entries to record the reconciliation.

You have the option to recognize the cash either when you reconcile the draft on a bank statement, or on the due date for nondiscounted drafts or the discount date for discounted drafts. Specify the method to use when you set up your draft types. This table shows how the draft cycle looks:

Dishonor Draft

You dishonor a draft at any point in the draft life cycle after you approve it. After you dishonor the draft, you decide what action to take on the draft. When you dishonor a draft, the system changes the draft status to D (dishonored). The system debits the dishonored draft receivable account and credits the appropriate account. The account that the system credits is based on the system function associated with the business event that occurred before you dishonored the draft.

Void

You void a draft at any point in the draft life cycle after you approve the draft until you reconcile the draft on a bank statement. When you void a draft, the system reopens all the items associated with the draft. This process changes the draft status to E (Void).

Cancel Remittance

You cancel a remittance after you remit a nondiscounted draft either before or after the due date but before you reconcile the draft on a bank statement. For discounted drafts, you must cancel the remittance before the discount date or after you dishonor it. Canceling a remittance returns the draft to the state it was in after you approved and posted it. The system changes the draft's status to A (Accepted). You can remit the draft again at a later date.

Accounting Entries for Draft Voids and Cancel Remittances

When you void a draft or cancel a remittance, the system looks at the last activity that occurred to determine what accounting entries to create. It creates accounting entries that net the activities that have occurred. For example, if you are voiding a non-discounted draft after the due date, the system credits Cash and debits Accounts Receivable to net the following entries: