Well-documented policies and procedures for who should handle which accounts receivable responsibilities, and how those responsibilities should be handled, is an important factor in establishing strong internal control over accounts receivable Be sure to implement these controls along the entire accounts receivable management process:
Receive a Purchase Order from Your Customer
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.
Prepare the Sales Invoice
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.
Post the Sales Journal
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.
Post the Accounts Receivable 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.
