A company sends a check payment to a third party (vendor or employee) in error. How would the company deal with the following two situations in Oracle Payables?
1) The (vendor or employee) has received and cashed the check
2) The (vendor or employee) has not yet cashed the check

1) Here, I think, there are different possible ways the company could treat this in Oracle Payables, knowing the company deals with the vendor or employee on regular basis. But, what are those possible accounting treatments?

Also, what about if the payment was meant for a customer as a compensation payment following a customer complaint, but then the payment went to a wrong one-off customer who cashed the check and has since disappeared? Please, help!

2) Question 2 is more straightforward.
The company would ask its bank to stop the check with the given number. Mean while, the company will Initiate a Stop to the check. When the bank actually stops the check, the company will void the check in the Payables system.

1) You business process will dictate how to deal with this (collection etc). If the vendor returns you the money you might want to enter a misc receipt in AR.
2) Try stop payment. Otherwise if will be treated as 1)

Stop payment does not have any accounting impact.
Accounting impact only kicks in when you void a payment. Lines are reversed.
From accounting perspective the payment has taken place, when the check is cashed (irrespective of the fact if it is cashed by the right vendor or by the thieves).

1) What accounting entries can we record in AR if we cannot catch the thieves and recuperate the money back from them?

2) Assuming that the money went to a wrong regular vendor which has already cashed the check, could we raise a Debit Memo in Payables against this vendor? How do we go about it?
Thank you. Or, would it be something like a Refund?

I am not an accountant but the situation will call for a bad debt write off entry.

1) You entered the invoice.

Debit: Invoice Expense $100
Credit: Payables $100

2) You paid this invoice to the wrong vendor

Debit: Payables $100
Credit: Cash $100

3) Assuming you have paid $100 to a wrong person and the person is not returning you the money, you will record following. It could be entered in GL directly unless you are using collection functionality.

DEBIT: Bad debit expense (or you can call this account anything) $100
CREDIT: Invoice Expense $100

4) You need to re-enter another invoice in the system so that you could pay the actual vendor who was suppose to be paid in the first place.

Debit: Invoice Expense $100
Credit: Payables $100

5) You pay the real vendor

Debit: Payables $100
Credit: Cash $100

Thank you Hasan.
Your method is sound and clear.
But, don't you think that the accounting entries under item 4) would create a period end reconciliation problem in that the GL liability account would not reconciled with Trial Balance liability account in Payables?

Hasan,
What if a (check) payment went out to a wrong vendor which is willing to pay back the money to us, but we have not implemented or using any accounts receivables. Could we capture this scenario in any way at all in Oracle Payable (using credit memo, for instance); assuming we do not want to enter the transaction directly into Oracle GL?
Thank you.

Why do you think so? Please explain. May be I am missing your point. In step 4 we are entering the invoice directly in AP not in GL.

Rule of thumb to avoid reconciliation issues is that "never use AP Liability account directly in GL".

I dont know of any such method we can use in AP to capture incoming payment. Reversing the original payment will not cut out as it will not record the incoming payment details.

Sorry, I got it wrong. I was thinking that item 4) was entered directly in GL. It was my mistake.
However, I think, if the vendor has agreed to pay back the money which went to them by mistake, we could capture this in Accounts Payable by raising a Credit Memo by that amount against that vendor. Can we do this?

Credit/Debit memos are one thing and receiving payment from outside world is another thing. Credit memo is used to record a credit. For example you purchased 2 laptops and returned 1. You can enter a credit memo for one laptop. When you receive payment it is recorded as a receipt. Please read more on R12 AP/AR Netting feature.