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34.5 Accounts Receivable Controls

Overview​

Accounts receivable controls protect against uncollectible receivables, ensure accurate recording, and support cash collection. Effective controls help maintain healthy cash flow and prevent losses from bad debts.

Credit Controls​

Credit Approval​

Credit Approval Procedures:

  • Establish credit policies
  • Require credit applications
  • Check customer creditworthiness
  • Set credit limits
  • Approve credit before sales

Credit Limits​

Credit Limit Management:

  • Set appropriate credit limits
  • Monitor credit usage
  • Review limits regularly
  • Adjust limits as needed
  • Enforce limits

Billing Controls​

Invoice Controls​

Invoice Procedures:

  • Issue invoices promptly
  • Use pre-numbered invoices
  • Verify invoice accuracy
  • Match invoices to sales
  • Track invoice numbers

Invoice Accuracy​

Accuracy Controls:

  • Verify prices and quantities
  • Check calculations
  • Verify customer information
  • Review before sending
  • Correct errors promptly

Collection Controls​

Collection Procedures​

Collection Procedures:

  • Monitor receivables aging
  • Follow up on overdue accounts
  • Send reminders
  • Escalate collection efforts
  • Write off uncollectible accounts

Aging Analysis​

Aging Reports:

  • Regular aging analysis
  • Identify overdue accounts
  • Prioritize collection efforts
  • Monitor trends
  • Take action on old accounts

Bad Debt Controls​

Bad Debt Recognition​

Bad Debt Procedures:

  • Identify uncollectible accounts
  • Estimate bad debt expense
  • Record allowance for doubtful accounts
  • Write off bad debts
  • Document write-offs

Allowance Method​

Allowance for Doubtful Accounts:

  • Estimate uncollectible amount
  • Record allowance
  • Adjust allowance regularly
  • Write off when confirmed uncollectible
  • Recoveries recorded if received

Luxembourg Compliance Note​

Important Requirements:

  • Receivable records: Must maintain accurate receivable records
  • Bad debt accounting: Must account for bad debts (PCN)
  • VAT on receivables: Must handle VAT correctly
  • Collection procedures: Should have collection procedures
  • Documentation: Must document receivable procedures

Common Issues:

  • No credit approval: Extending credit without approval
  • No collection follow-up: Not following up on overdue accounts
  • No bad debt allowance: Not estimating bad debts
  • Invoice errors: Errors in invoicing
  • Poor documentation: Inadequate receivable documentation

Think It Through​

TechLux Solutions extends credit to business customers. Some customers pay late or not at all. What controls should they implement for accounts receivable?

Concepts in Practice​

Accounts Receivable Controls Example

TechLux Solutions receivable controls:

Credit Controls:

  • Credit application required
  • Credit check performed
  • Credit limits set (€5,000-€50,000)
  • Credit terms: Net 30 days
  • Owner approves credit

Billing Controls:

  • Invoices issued within 2 days of service
  • Pre-numbered invoices
  • Invoice accuracy verified
  • Invoices tracked
  • Errors corrected promptly

Collection Controls:

  • Aging report reviewed monthly
  • Reminders sent at 15, 30, 45 days overdue
  • Collection calls for accounts >60 days
  • Legal action considered for accounts >90 days
  • Owner reviews collection efforts

Bad Debt Controls:

  • Allowance for doubtful accounts: 2% of receivables
  • Bad debts written off after 180 days
  • Write-offs approved by owner
  • Recoveries recorded if received

Result: Effective receivable controls, healthy cash flow, bad debts minimized, collection improved.