What is positive pay?

Definition

Positive pay is a bank service that pays only checks matching a file the company uploaded. On the books it is not a journal by itself, but a filter on what the bank is allowed to clear.

The company tells the bank the check number, amount, payee, and date for every item it issued. A presented check that does not match is held as an exception instead of draining cash.

Where it shows up

Cash flow: Related to stopping a check that should not leave cash.

Balance Sheet: Related to cash that stays put when a bad check is rejected.

P&L: Related to nothing extra unless a later fraud loss is recorded.

See also: Check Run · Internal Controls · Bank Reconciliation

You will not see a positive-pay line on the Balance Sheet. Cash in current assets simply stays put when the bank rejects a check that was never issued.

The Income Statement is quiet unless a forged item already cleared and you later record a loss. The usual case is that the bad check never hits cash at all.

On the Statement of Cash Flows, the point is the payment that did not leave. A rejected item never becomes operating cash out.

The bank rec is easier when issued checks and cleared checks tell the same story. Exceptions show up as items the bank presented that you did not put on the issue file.

Accounts payable does not change because of the filter. The payable was already reduced when the real check was recorded, and a forged item was never your bill.

How it works

After you print or issue checks, you send the bank a file of those items. The file is the list the bank will treat as valid.

When a check is presented, the bank compares number, amount, and often payee to that file. A match clears in the usual way.

A mismatch is an exception. The bank asks you to decide, within a short window, whether to pay it or return it.

If you return it, cash never leaves. If you tell the bank to pay it, cash leaves and you treat that as a real clearing, then you chase why the file was wrong.

Payee positive pay adds the name on the check to the match. That catches a stolen check that was washed and rewritten to someone else for the same amount.

Reverse positive pay is the other direction. The bank sends you the presented items, and you approve or reject them, instead of you sending the issue file first.

This page stays on the filter, not on the original vendor bill. The bill created the payable, and the later check run created the issue list the bank will use.

There is no debit and credit for turning the service on. Book a bank fee if the bank charges for it, and book a loss only if a bad item actually cleared.

Support is the issued-check file plus the exception reports. Keep both with the bank rec so you can see why an item was paid or returned.

Example

A cafe prints Friday checks for bakery bills and uploads the issue file the same afternoon. The file lists check 1044 to the bakery for $1,200, plus the rest of that day's items.

On Monday someone presents check 1044 made out to a person the cafe does not know, for $4,800. The bank holds it because the payee and amount do not match the file.

The cafe tells the bank to return the item. Cash never leaves, and no journal is required for the rejection.

If the cafe had skipped the upload, the forged check might have cleared. Then cash would be down $4,800, and the later loss would hit the Income Statement until the bank or the forger made it good.

The bakery's real $1,200 check still clears when it is presented with the right payee and amount. That clearing is the payment already on the books.

Common mix-ups

Positive pay is not the check run. The run is the batch that pays approved bills, and positive pay is the later bank match against the list of checks that run produced.

Positive pay is not a bank rec. The rec explains every difference between book cash and the statement, while positive pay is a filter that tries to stop a bad item before it becomes one of those differences.

Positive pay is not a guarantee that cash is safe. A check that matches the file will still clear, so a wrong amount on your own issue file can pay a bill you did not intend.

Related terms

• Check Run: The scheduled batch in which approved vendor bills are paid.
• Internal Controls: The procedures that keep the books accurate and assets protected.
• Bank Reconciliation: Matching the book cash balance to the bank statement and explaining every difference.
• Outstanding Check: A check written but not yet cleared by the bank.
• Operating Bank Account: The main checking account through which day-to-day receipts and payments flow.
• Segregation Of Duties: Splitting recording, approving, and payment tasks so no one person controls a transaction end to end.
• Bank Statement: The bank's period record of every transaction and the ending balance.
• Duplicate Payment: Paying the same vendor bill twice.