Accounting Best Practices, Fifth Edition

4–8. Transmit Transactions via Electronic Data Interchange

Sending an invoice to a customer requires some labor, cost, and time, but does not guarantee that the invoice will be paid. For example, someone must print out an invoice, separate the copy that goes to the customer, stuff it in an envelope and mail it, which may then take several days to reach the customer, be routed through its mailroom, reach the accounts payable department, and be entered into the customer’s computer system (where the data may be scrambled due to keypunching errors). The invoice may even be lost at the customer site and never be entered into its computer system for payment at all.

To avoid all of these issues, a company can use electronic data interchange (EDI). Under this approach, a company’s computer system automatically issues an electronic invoice that is set up in a standard format (as defined by an international standard-setting organization) and transmits it to a third-party mainframe computer, where it is left in an electronic mailbox. The customer’s computer automatically polls this mailbox several times a day and extracts the electronic invoice format. Once received, the format is automatically translated into the invoice format used by the recipient’s computer and stored in the accounting system’s database for payment. At no time does anyone have to manually handle the data, which eliminates the risk of lost or erroneous invoicing data. This is an excellent approach for those companies that ...