Definition of Collections – Collections are a bank service for billing payments for letters or valuable documents to third parties at other places or cities in the country in the context of settling bills or receivables in the form of valuable letters or documents that can be processed are money orders, checks, giro bills, receipts, promissory notes/acceptances and raffle prizes.
Collections are beneficial for customers, including saving costs and time for processing billing transactions to be more efficient, and minimizing the risk of loss. While the benefits of collection for the bank will get a commission as well as a means of promoting the introduction of customers handled. In addition, it can precipitate collection funds.
Meaning of Accounts
Based on the Big Indonesian Dictionary (KBBI), the definition of collection is the process of collecting receivables from collectible parties based on a predetermined script for the risk of billing. Meanwhile, according to the Financial Services Authority (OJK), the definition of collection is collection of checks and other debt instruments including letters of acceptance and bonds to issuers of securities, as well as receiving payments from paying banks.
In short, collection is one of the banking services by involving third parties in the process of collecting receivables in the form of bills or securities that have not been paid. In addition to collection, transfer of funds can be done by clearing. The difference between clearing and collection lies in the object. Clearing is the transfer of assets in the form of large amounts of money, while collection is the transfer of assets in the form of money orders, demand deposits, checks, money orders and receipts.
Collection Types
After understanding the meaning of collection in the banking world, you must know several types of collection. The reason is, there are two types that are distinguished based on the circulation of funds and transaction systems, including the following.
1. Based on Fund Traffic
When viewed from the flow of funds, collection is divided into two, namely incoming and outgoing. In the incoming flow, collections are the number of incoming bills that are charged to the customer’s account. Meanwhile, collection out is a form of billing to third parties outside the city after carrying out orders from customers.
2. Based on Transactions
Based on the type of transaction, the distribution of collections is based on the presence of file attachments. Namely, drafts without the need for documents such as checks and demand deposits, and drafts by attaching important documents, such as insurance policies and other securities that have been approved by the bank.
Collection mechanism
As with other bank services, the collection system varies depending on the following three types of collection implementation mechanisms in Indonesia.
1. Via the Bank itself
In the bank’s own mechanism, collection is carried out if the destination bank is in the same city as the buyer’s bank. That way, the collection service will make it easier for customers to make bills, even though the location is quite far.
2. Via Correspondent Bank
The next mechanism is the existence of a third party to assist collection activities. If the designated bank does not have a branch in the same city as the customer, a correspondent bank is required. The process in this system is also quite complicated and takes a little longer compared to via the bank itself.
3. Between Bank Own Branches
This mechanism is the easiest process compared to via the bank itself or correspondents. This is because in this collection mechanism service both use the same parent bank with different branch locations.
Parties Involved in Collections
With regard to collections, the parties involved in bank collections are the executors and initiators. Here is the full explanation.
1. Initiating Bank
Collection initiating bank is a party that has the duty of being the recipient of drafts in the form of money orders, current accounts, and checks from third parties to be billed. And later the profits will be given at the end of each month in the amount of 50% of the total commission.
2. Executing Bank
The collection implementing bank is the party whose job is to collect using media in the form of scripts, such as checks and giro to third parties on orders from the initiating bank.
Collection Case Example
To make it easier for you to understand, consider the following examples of collection cases:
Budi is a current account customer at the Jakarta branch of Bank X. He gave a demand deposit check with a nominal value of IDR 45 million from a customer in Bandung to be transferred to his account. If the commission is set at 0.25%, the collection fee is…
Total scripts
= Items received – Inkaso
= IDR 45 million – (IDR 45 million x 0.25%)
= IDR 45 million – IDR 122.5 thousand
= IDR 44.8775 million
Collection Simulation Example
- To Bank NSC Surabaya to order collection of notes issued by Bank NSC Jakarta to the collector in Jakarta.
- Bank NSC Surabaya makes a cover letter for collection and sends it together with the invoice to be billed to Bank NSC Jakarta by post or by courier service.
- After Bank NSC Jakarta received a collection cover letter and collection slip from Bank NSC Surabaya, then billed the collector debited the collector’s account at Bank NSC Jakarta.
- And after it is confirmed that the funds collected from the collection bill have been successfully invoiced, the funds will be sent/credited to Bank NSC Surabaya. Furthermore, Bank NSC Surabaya will hand them over to the collector.
Domestic Collection Simulation
- To Bank NSC Surabaya to order collection of notes issued by Bank BENI Jakarta to the collector in Jakarta.
- Bank NSC Surabaya makes a cover letter for collection and sends it together with the invoice to be billed to Bank NSC Jakarta by post or by courier service.
- After Bank NSC Jakarta received a collection cover letter and collection slip from Bank NSC Surabaya, then billed Bank BENI Jakarta through the clearing facility in Jakarta.
- Bank BENI Jakarta receives a clearing bill from Bank NSC Jakarta, then debits the collector’s account at Bank BENI Jakarta.
- After it is confirmed that the collected funds have been collected successfully, the funds will be sent/credited to Bank NSC Jakarta via clearing. Then Bank NSC Jakarta will send the collection results to Bank NSC Surabaya, then Bank NSC Surabaya will hand them over to the collector.
Overseas Collection Simulation
- To Bank NSC Surabaya to order collection of notes issued by City Bank New York to the collector in New York.
- Bank NSC Surabaya makes a cover letter for collection and sends it together with the invoice to be billed to Bank NSC Jakarta Head Office by post or by courier service.
- Collections abroad must go through the head office of the bank concerned because only the head office of the bank in Indonesia has a depository correspondent relationship with overseas banks.
- After Bank NSC Jakarta Head Office received a cover letter for collection and collection slip from Bank NSC Surabaya, then billed it to Nostronya City Bank New York through an expedition service.
- City Bank New York receives a collection note from Bank NSC Jakarta Head Office, then debits the collector’s account at City Bank New York.
- When successfully billed, the funds will be credited to the account of Bank NSC Jakarta Head Office to him.
- After the account of Bank NSC Jakarta Head Office at City Bank New York is credited for the collection results, Bank NSC Jakarta Head Office sends the collection results to Bank NSC Surabaya.
- Furthermore, Bank NSC Surabaya will hand it over to the collector
Collection Profits
After understanding the meaning of collection and examples, it’s a good idea to know some of the benefits of collection that a customer gets, including the following.
1. Save Cost
Billing notes in different cities of course requires a large fee. That way, collection is one solution. The reason is, collection costs are smaller when compared to billing independently, as well as controlling budget management.
2. More Time Saving
Besides being able to save costs, another advantage of collection is that it saves more time. With the collection service, the bank will assist you in billing. So it doesn’t take much time.
3. Avoid the Risk of Losing
Most collection users are trading companies that may frequently send money or make large payments. By using collection services, conducting transactions between companies will be very safe and avoid all risks of crime.
Outgoing Collection Accounting
1. Collection Transaction Process
Bank collection is a bank activity that contains uncertainty. Banks make transactions, but not every bank transaction will produce results. The collector may not be able to pay the bill, so the executing bank cannot force the collector to pay it.
To find out the success of the collection system, it takes time for confirmation. During the interval of receiving the order to collect until the bill is successful or not, this transaction must be recorded in an administrative account. Considering that the initiating bank will pay the trustor if the transaction is successful, then this transaction is actually a conditional transaction.
Thus these administrative records are grouped in the liability contingency account. Recording in this account uses a single journal entry credit position. This account will be outstanding during the grace period awaiting results. If the transaction is successful, it is immediately credited or paid to the account of the giver of the trust. And automatically the administrative account for collection must be nullified (debited), because the collection transaction is real or effective and is recorded in a real account.
The problems that arise are regarding transaction commissions and paperwork fees. If the transaction is successful, the bank will deduct the customer’s account for wire/transfer fees only. The results of this transaction can be directly credited to the depositor’s current account or savings account at the initiating bank. If the results of the transaction are to be given to non-customers, the bank must first record in the administrative account of the transaction slip that will be paid.
2. Recording of Collection Transactions
Consider the following example of recording an inter-branch collection journal:
On May 10, 2018 bank A Semarang received a collection item order (cheque deposit/BG bank A in Bandung) from Amir to be deposited into bank A Bandung at Mr. Ali’s expense in the amount of IDR 100,000,000
When receiving BG check deposits (scripts), bank A Semarang as the initiating bank must record the following in the administration account:
May 10, 2019:
cr. Inkaso items paid and billed IDR 100,000,000 (Credit)
Recording with credit position journal entries, because this transaction is conditional in nature and if successful will result in the initiating bank’s obligation to submit/credit to the account of the trustee.
On the same day bank A Semarang received confirmation that the transaction for Mr. Ali’s expense, a customer of bank A Bandung was declared effective (there were funds).
If so, then the initiating bank’s duties:
- Eliminate administrative account for this transaction.
- Delegating the proceeds of the bill to those entitled by recording it in a real/effective account. The transaction commission is set at 0.05%.
And the recording of the bank transaction journal is as follows:
May 10, 2019:
Dr. Inkaso paid up and billed IDR 100,000,000 (Debit)
While the recording of transaction journals in real accounts is as follows:
May 10, 2019:
Dr. RAK Bandung Branch IDR 100,000,000 (Debit)
Cr. Amir’s Current Account IDR 99,500,000 (Credit)
Cr. Commission income IDR 500,000 (Credit)
The delegation of transaction proceeds is actually not only to the giro, but depends on the request of the giver of the mandate.
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As an example:
Can be to savings or other accounts desired.
In the example above, it is assumed that Amir is a customer of bank A Semarang.
If Amir is not a customer of the bank, then bank A, in addition to recording the administrative account as above, will also first record it in the following account:
May 10, 2019:
Dr. RAK Bandung Branch IDR 100,000,000 (Debit)
Cr. Bills of collection have been billed and will be paid Rp 100,000,000 (Credit)
This journal entry is to hold until the trustee comes to the bank to collect it.
If the giver of the mandate takes it in cash, it will be recorded in bank A Semarang:
May 10, 2018:
Dr. Collection items have been billed and paid Rp 100,000,000 (Debit)
Cr. Cash IDR 99,500,000 (Credit)
Cr. Commission Income IDR 500,000 (Credit)
What about administrative accounts?
Administrative accounts are also nullified like the previous journal entry.
Account Collection Accounting Entered from the Bank’s Own Branch
For incoming collection accounting originating from the bank’s own branch, the implementing bank’s task is to charge the collector’s account.
As an example of continuation of the previous example, that Ali agreed to pay with Ali’s Giro burden of IDR 50,000,000, Ali’s savings burden of IDR 20,000,000.
And the check from bank A Bandung that was withdrawn by Amir was IDR 30,000,000, so the incoming collection journal entry at bank A is:
May 10, 2019:
Dr. Ali’s Giro IDR 50,00,000 (Debit)
Dr. Ali Savings IDR 20,000,000 (Debit)
Dr. Gito Amin IDR 30,00,000 (Debit)
Cr. RAK Semarang Branch IDR 100,000,000 (Credit)
Interbank Collection Transactions via the Bank’s Own Branch Offices
1. Collection Process Through Own Branch Offices
Collection transactions between banks can be completed through the bank’s own branch office closest to the designated bank’s clearing area. Thus the initiating bank that conducts the transaction will only deal with the account with its branch office, while the branch office itself will deal with the gross account of the branch which will deal with other banks in different clearing areas that have issued checks/bilyet giro. Therefore, the recording of this transaction occurs at the initiating bank, the implementing bank of its own branch or other collectible banks.
2. Example of Collection Journal via Own Branch Office
Consider the following example of journal entry:
On May 15, 2019 a customer of bank A in Jakarta named Y sold electronic goods to X a customer of bank B Surabaya. Total transactions worth IDR 500,000,000.
On the same day X withdrew a late check to pay Y which could be cashed on May 20 2019.
On May 20, 2019, Y deposited into bank A for the benefit of his current account in the form of a check from bank B Surabaya which was withdrawn by X in the amount of IDR 500,000,000
Recording at bank A when receiving deposit of collection notes is:
Recording in administrative account:
May 20, 2019:
Dr. RAR Collection Items paid and billed IDR 500,000,000 (Debit)
On the basis of the check deposit, bank A Jakarta then sends the check/BG via expedition to its branch office in Surabaya for clearing.
If Bank A Surabaya branch has informed that the check has been validated by bank B Surabaya and declared effective through clearing.
So bank A Jakarta immediately posted the results to account Y after deducting the transaction commission.
Commission Registration
Transaction commission value IDR 1,000,000. For example, on May 21 2019 the funds were declared effective by bank A Surabaya, then the recording of the transaction journal at bank A Jakarta is:
May 21, 2019:
cr. RAR Bill of collection and billed IDR 500,000,000 (Credit)
Dr. RAK Surabaya Branch IDR 500,000,000 (Debit)
Cr. Current Account Y IDR 499,000,000 (Credit)
Cr. Commission Income IDR 1,000,000 (Credit)
Recording of transactions at the implementing branch (bank A Surabaya) are:
When collecting through clearing with bank B Surabaya:
May 21, 2019:
Dr. RAR Clearing Items IDR 500,000,000 (Credit)
When clearing is declared successful or funds are declared effective:
May 21, 2019:
Dr. RAR Collection Items paid and billed IDR 500,000,000 (Debit)
Dr. BI current account IDR 500,000,000 (Debit)
Cr. RAK Jakarta Branch IDR 5000,000.00 (Credit)