There are many rules an accountant must follow when recording financial transactions. For all the rules put in place, accountants have found ways to violate them with tricks and schemes. Lapping is one of those schemes that accountants use to handle shortages in accounts receivable payments from customers. These shortages are the result of theft and mismanagement of cash receipts.
Lapping is a scheme where the accountant uses payments received from one customer to count towards another customer's account. Customer A pays $50 toward her account. The cashier pockets the money. Customer B pays $75 towards his account. The bookkeeper credits $50 toward Customer A, waiting for another $50 to come in to credit Customer B. This process continues for all customers until the end of the month. At this point, the accountant must report the loss on the financial statements.
Why Lapping Is Bad
Lapping is a scheme for hiding lost cash receipts. In the event that money is stolen by the cashier or another employee, accounting laws state the company must account for the loss in accounts receivable as a cash loss and a credit of accounts receivable as a whole. The money cannot be counted as applied to a receivable account. An overage in claimed accounts received falsifies the financial statements for the business and its profitability.
Correcting Lapping Schemes
To correct a lapping scheme on the books for a company, you must determine when the funds were taken. The account needs to be credited the amount of the payment. The company records it as a cash loss, not as received cash on the debit sheet. This shows the money as being paid by the customer and lost within the company. It ensures the financial documents are in line with the law and are not overstated as cash receipts.
To prevent lapping, a company should have guidelines in place. An independent audit can help. Comparing deposit slips with the originals at the bank can show if the slips have been altered. Frequent cash counts of registers and cash on hand help catch loss early. Proper accounting techniques need to be utilized at all times. Employees must be held accountable with a zero-tolerance policy for theft and cash loss on their shifts.