Lapping is a fraud scheme, and in particular, it is a type of skimming. Skimming is any type of scheme where someone is removing cash from the company before it is ever even recorded in the accounting system. According to AccountingTools, what is unique about lapping is that the perpetrator, the person committing the fraud after they steal the money, is actually going to take money from another customer’s account to cover it up so that nobody finds out.
For example, there is a customer who owes your company $8000. They then mail your company a check for $10000. So it should be that their balance goes to zero. However, the employee at your company who is in charge of opening the mail steals the $8000. They take the check and they end up getting it cashed, and they take the $8000 for themselves. So instead of this customer’s balance being zero, it is going to be $8000. So what is going to happen? Well, in a week or two or, the customer is going to get a notice from your company saying they never paid the balance of $8000.
Now, the person who committed the fraud is aware of that. So this employee is going to try and find ways to conceal this. Your employee is going to take the next check that comes in from another customer and use it to settle the previous customer’s outstanding balance. So from your company’s accounting records now, the initial customer’s balance was cleared. Using the new money from customers to credit the prior customers balance so that no one ever finds out about this is called lapping.