Analyzing accounts receivable according to when they are due.

Accounts receivable represent debts owed to the University for goods and services the University has provided to its customers. These short-term debts are normally expected to be repaid in 30 days with no interest charge.

The responsibility for collecting accounts receivable is usually left to the department that provided the goods or services. This section details the department head’s responsibilities for the accounts receivable function.

Key Terms

An aging is a method of analyzing the collectability of outstanding accounts receivable. An aging is performed by categorizing individual customer account balances according to their age (normally the time since the last payment was received).

A write-off of accounts receivable reduces the customer account balance to zero. Accounts that are determined to be uncollectible may be written off the University’s accounting records.

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Safeguards for Accounts Receivable

• Where possible, separate the duties of the accounts receivable specialist from the cashier (the employee who receives and records payments).
• Document the department’s routine collection procedures in writing.
• Retain documentation of all collection efforts, including copies of invoices, correspondence with customers, notes of phone calls, memos to legal counsel, and correspondence with collection agencies.
• Discontinue services for delinquent customers and place holds on the release of student grades and records and on registration privileges when allowable.
• Use prenumbered invoices and account for all invoices.
• Require an employee who does not handle cash receipts to approve payment of credit balances and credit adjustments to the account balance.
• Direct customers who dispute their account balances to someone other than an employee who receives payments.
• Periodically reconcile the total of customer accounts receivable to the control balance (see Customer and Control Accounts below).
• Age customer accounts receivable balances and review past-due accounts at least quarterly.

Note: Many accounting software products offer accounts receivable functions that may provide several of the safeguards mentioned above. If your department plans to use such a product, you should discuss the intended implementation of the product with your campus/institute internal audit department to ensure that the necessary safeguards are in place.

Lesson Learned

An employee stole several thousand dollars by taking customer payments and fraudulently adjusting their accounts.

Better monitoring of payment information, separating collection and posting responsibilities, and additional requirements for account adjustments would have prevented this theft.

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Customer and Control Accounts

When a customer receives goods or services on credit, the amount of the sale should be added (a debit entry) to the customer’s account, thus increasing the balance. When the department receives a payment from the customer, the amount of the payment should be subtracted (a credit entry) from the account, thus decreasing the balance. At any point, the difference between the credit sales and payments recorded will be the customer account balance. Generally, a positive balance represents the total accounts receivable the customer owes to the University.

Customers’ payments and credit sales are maintained in a single summary account called a control account. As with customer accounts, credit sales increase the balance of the control account, and payments from customers decrease the balance. (These entries usually are made in summary form.) The difference between the charges and payments is the control balance (sometimes called the control total). If correct, the control balance should equal the sum of all customer account balances. A difference would indicate an error in either the control balance or one or more customer account balances.

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Your Role in Managing Accounts Receivable

Your primary responsibility is to ensure that your department has procedures in place to accomplish the activities listed below. These activities may be delegated to a staff member.

AB Aging of accounts receivableAnalyzing accounts receivable according to when they are due. Allowance methodCrediting the estimated value of uncollectible accounts to a contra account. Book valueThe difference between an asset’s account balance and its related contra account balance. Book value of accounts receivableThe difference between the balance of Accounts Receivable and its contra account, Allowance for Uncollectible Accounts. Direct write-off methodRecording uncollectible accounts expense only when an amount is actually known to be uncollectible. Dishonored noteA note that is not paid when due. Interest incomeThe interest earned on money loaned. Interest rateThe percentage of the principal that is due for the use of the funds secured by a note. Maker of a noteThe person or business that signs a note and thus promises to make payment. Maturity dateThe date on which the principal of a note is due to be repaid. Maturity valueThe amount that is due on the maturity date of a note. Net realizable valueThe amount of accounts receivable a business expects to collect. Note payableA promissory note signed by a business and given to a creditor. Note receivableA promissory note that a business accepts from a person or business. PayeeThe person or business to whom the amount of a note is payable. Percent of accounts receivable methodA method that uses an analysis of accounts receivable to estimate the amount that will be uncollectible Percent of sales methodA method used to estimate uncollectible accounts receivable which assumes that a percentage of each sales dollar will eventually become uncollectible. PrincipalThe original amount of a note, sometimes referred to as the face amount. Promissory noteA written and signed promise to pay a sum of money at a specified time Time of a noteThe length of time from the signing date to the maturity date, usually expressed as the number of days; also referred to as "term" of note. Uncollectible accountsAccounts receivable that cannot be collected. Writing off an accountCanceling the balance of a customer account because the customer does not pay.

What is analyzing accounts receivable according to when they are due?

What is the analysis of receivables method?

What are the 5 strategies for effective accounts receivable management?

Which of the following is an effective tool for analyzing accounts receivable?