Accounting Best Practices, Fifth Edition

3–14. Receive Billings through Electronic Data Interchange

Many of the larger companies, especially those in the retailing industry, have been using electronic data interchange (EDI) for some time. This section describes what EDI is, how it works, why more companies should use it, and why so many do not.

EDI involves the transfer of electronic documents between companies. These documents are sent in strictly defined formats, of which there are over a hundred, one for each type of standard company transaction, including a supplier billing. These formats tend to be very large and complex because they are designed for use by multiple industries; most companies only need to fill out a small portion of each EDI message. Once completed, an EDI message is transmitted to the recipient. This can be done directly, but it usually goes to a third-party provider who maintains a mainframe computer that receives messages from a number of subscribing companies. The message recipient dials into its electronic mailbox at the third-party’s mainframe (usually several times a day) to pick up any EDI messages. The recipient then enters each EDI message into its own system for further processing. The reader may notice that a company could achieve the same rapid transfer of information by sending a fax with the same information. This is true, but if properly installed, EDI allows for a greater degree of automation by linking directly into a company’s computer system. For example, a paper-based fax must ...