What are Accounts Receivable Controls?

Accounts receivable controls are internal control policies and procedures implemented by a company to ensure the accuracy, validity, and timely collection of outstanding amounts owed by customers. These controls aim to minimize the risk of errors, misstatements, and potential fraud in the accounts receivable process and help maintain the overall financial health of the company.

Some common accounts receivable controls include:

• Credit approval process: Establish a clear credit approval policy to assess customers’ creditworthiness before extending credit. This may involve checking credit references, credit scores, and payment history to minimize the risk of bad debts.
• Sales documentation and authorization: Ensure that all sales transactions are supported by proper documentation, such as sales orders, invoices, and shipping documents, and that they are authorized by the appropriate personnel.
• Segregation of duties: Separate the responsibilities for recording sales, maintaining accounts receivable records, and handling cash receipts to reduce the risk of errors or fraud.
• Regular reconciliation of accounts receivable: Periodically reconcile the accounts receivable subsidiary ledger with the general ledger to identify and correct discrepancies.
• Accounts receivable aging analysis: Review and monitor the accounts receivable aging report regularly to track overdue balances and identify potential collection issues.
• Collection procedures: Establish clear and consistent collection procedures to follow up on overdue accounts, such as sending payment reminders, making collection calls, or engaging a collection agency if necessary.
• Allowance for doubtful accounts: Estimate and record an allowance for doubtful accounts based on historical collection data, industry trends, and the company’s collection experience.
• Write-off and recovery policies: Implement policies for writing off uncollectible accounts and recovering amounts previously written off when appropriate.

Example of Accounts Receivable Controls

Let’s consider a fictional company called “SmartGadgets,” which sells electronic gadgets to retailers on credit. To ensure the accuracy and validity of its accounts receivable balances, SmartGadgets implements a set of accounts receivable controls:

• Credit approval process: SmartGadgets has a credit application form that new customers must complete. The company checks the customers’ credit references, credit scores, and payment history before approving credit limits and payment terms.
• Sales documentation and authorization: SmartGadgets issues sales orders and invoices for all credit sales, and each transaction must be approved by the sales manager before being recorded in the accounts receivable system.
• Segregation of duties: The company assigns different employees to record sales transactions, maintain accounts receivable records, and handle cash receipts. This separation of responsibilities reduces the risk of errors and fraud.
• Regular reconciliation of accounts receivable: SmartGadgets’ accounting team reconciles the accounts receivable subsidiary ledger with the general ledger on a monthly basis to ensure accuracy and identify discrepancies.
• Accounts receivable aging analysis: The company reviews its accounts receivable aging report every month to monitor overdue balances and prioritize collection efforts for high-risk accounts.
• Collection procedures: SmartGadgets has a well-defined collection process, which includes sending payment reminders, making collection calls, and, if necessary, engaging a collection agency for delinquent accounts.
• Allowance for doubtful accounts: SmartGadgets estimates an allowance for doubtful accounts based on historical collection data, industry trends, and the company’s collection experience. This allowance is recorded in the financial statements to reflect the estimated uncollectible accounts.
• Write-off and recovery policies: The company has a policy for writing off uncollectible accounts after exhausting all collection efforts. If a written-off account is later recovered, the company records the recovery as a reduction in bad debt expense.

By implementing these accounts receivable controls, SmartGadgets can effectively manage its outstanding balances, reduce the risk of errors and fraud, and maintain its overall financial health.