Internal Control Methods and Procedures for Accounts Receivable Debtors

Strong internal control procedures for managing accounts receivable are critical to improving cash flow, ensuring the reliability of financial information and combating the risk of fraud, error and loss of assets. The right tools and clear data can help you establish strong internal credit control of your accounts receivable management processes. These tools and data can inform how you standardize invoice creation, maintain and report receivable accounts, and how you collect payments and record invoice payments.

The following are some of the most common accounts receivable control methods, a comprehensive accounts receivable control checklist and additional resources for mitigating risk for accounts receivable.

Segregation of the duties of accounts receivable management is an important internal control method. By dispersing the accounts receivable management duties among different employees, you can increase oversight and reduce the opportunity for fraud. Segregation of duties for accounts receivable means that no one person has sole responsibility for more than one of the four main functions of accounts receivable management:

• Custody of accounts receivable
• Authorization to use the accounts receivable receipts
• Recording accounts receivable
• Production of accounts receivable reports

Internal control over accounts receivable often begins with receipt of the purchase order. When a customer’s purchase order is received, accounts receivable best practice is to review the purchase order to:

• Check that the pricing, terms and conditions agree with the sales order and company policy for credit terms;
• Ensure the order is authorized by the proper person;
• Review the customer’s credit rating before extending trade credit; and
• Check current account balance against balance limits.
• Create the Sales Order

Before issuing the sales order, be sure these control procedures for accounts receivable are in place:

• Check that the details on the purchase order match those on the sales order; and
• Ensure that the sales order is properly authorized or approved.

The sales invoice details the services or goods provided to the customer, the amount owed for the goods or services and the due date for the payment. Careful control of this process includes:

• Preparing the numbered invoice on a branded company template;
• Reconciling the invoice information against the sales order;
• Reviewing invoice calculations for accuracy;
• Checking that the customer’s address and contact person are correct; and
• Issuing the invoice to the customer on time.

The sales journal provides a clear view of each sales transaction, detailing what customers purchased, the credit extended and the payment received. Careful internal control over receivables includes these sales journal steps, including:

• Using an invoice copy to quickly post to the sales journal for each transaction;
• Reviewing journal entries against invoices to ensure accuracy;
• Filing invoice copies by invoice number; and
• Posting the sales journal totals to the accounts receivable control account in the general ledger.

The accounts receivable ledger is a record of all trade credit sales made by a business. Because the ledger records all customer invoice amounts, it provides a clear look at the amount of unpaid accounts receivable. Managing the accounts receivable ledger is a separate duty from collecting on invoices.

Recommended internal control procedures for the accounts receivable ledger include:

• Using an invoice copy to quickly post to the accounts receivable ledger as soon as an invoice is issued;
• Reviewing journal entries against invoices to ensure accuracy;
• Filing unpaid invoice copies by invoice date;
• Carrying out random checks of customer sales activity to identify any unusual patterns;
• Regularly reviewing credit balances for each customer;
• Creating an aged accounts receivable report;
• Reviewing the balances and flagging large and overdue accounts;
• Recording cash settlement discounts; and
• Reconciling the accounts receivable ledger with the accounts receivable control account in the general ledger.

Internal controls for the accounts receivable management workflow are vital in avoiding mistakes that can cause harm to your financial position. For added security, trade credit insurance can help you better manage business risks that are beyond your control, such as an interrupted cash flow due to late payment or non-payment of invoices. Learn how credit insurance works and how it can support prudent accounts receivable management. Download our free 

Guide to Trade Credit Insurance.