Lapping Scheme (Accounting) Definition
A lapping scheme refers to a fraudulent practice which involves altering accounts receivables to hide a stolen receivables payment. This method comprises taking a subsequent receivables payment and utilizing to cover the theft. The next receivable is applied to the former unpaid receivable, and so on.
A Little More on What is a Lapping Scheme
Lapping schemes usually occur in small companies where just one individual may control cash receipts, as well as, customer billing. Companies are capable of preventing lapping by carrying out regular cash receipt audits, and by separating cashier, as well as, billing responsibilities. Lapping scheme can be detected by tracing ways in which cash receipts have been applied to customer accounts. A sign of lapping includes an increase in the aging of accounts receivable. This scheme is capable of hiding the theft temporarily. Eventually, the shortfall gets revealed and is recorded as a loss.
Example of a Lapping Scheme
For instance, assume that a company receives a $150 payment, but is diverted by an accounting clerk to a personal account. In order to hide the theft, the clerk would apply the second receivable to come in, assume $200, to the first receivable. This leaves a leftover of $50 to be applied to the second receivable, and then $150 needs to be paid. The third payment would then be applied to cover the balance left on the second, the fourth would cover the third, while the fifth would cover the fourth, and so on.
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