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Dynamics GP – Transaction Flows in Account Receivable Systems

Overview

Accounts receivable represents that money owed by customers for merchandise sold or services rendered. Since most of the sale in modern business made on credit, accounts receivable often represents the majority of an organization’s working capital. Accounts receivable also maintains customer credit and payment history information, which is useful in the overall administration of company credit policies. Account receivable systems includes the followings.

Cash Receipts Department

The mail room under cash receipt department receives customer’s check along with a source document called the remittance advice. The remittance advice is a portion of the original invoice used to bill the customer. When payment is made, the customer tears off the remittance advice portion and return it to the seller with the cash payment.

The cashier verifies the accuracy and completeness of the checks against the remittance advice. After reconciling, the cashier records the cash receipts in the cash receipts journal.  Next, the clerk progress a bank deposit slip in triplicate showing the total amount of the day’s receipts and forwards the checks and two copies of the deposit slip to the bank. Upon the deposit of the funds, the bank teller validates the deposit slip and returns a copy to the controller.

Customer remittance sips are then forwarded to account receivable for posting from cash receipts department. Accounts receivable does not have access to the cash or checks that accompany customer remittance.

Billing

Invoices, credit memos, and other invoice adjustments are routed to accounts receivable for posting to the customer accounts. This maintains a separation of functions. Billing does not have direct access to the accounts receivable records.

Accounts Receivable

A company is responsible for maintaining the subsidiary accounts receivable ledger. A control account is maintained in the general ledger department. Debits and credits are posted to the customer accounts from the posting media-remittance advices, invoices, and so on-received from billing and cash receipts. This maintains separation of functions. Periodically, customer statements are mailed directly to customers by the accounts receivable department. Periodic processing also includes the preparation of an aged trial balance of the accounts receivable subsidiary ledger for review by the credit department. Other types of customer credit reports may be prepared based on the needs of the company. Such reports are often prepared as a by-product of the processing required to send customers their statements.

Credit

Credit department functions in an accounts receivable application system include the approval of sales returns and allowances and other adjustments to customer accounts, the review and approval of the aged trial balance to ascertain customer’s creditworthiness, and the initiation of write-off memos to charge accounts to bad-debt expense.

General Ledger

General ledger maintains the accounts receivable control account. Debits and credits are posted to the accounts receivable control account from the journal vouchers/control totals received from billing and cash receipts. These amounts are reconciled to the control totals sent to the general ledger directly from accounts receivable, this reconciliation is an important control in the accounts receivable application system.

Write-off of Accounts Receivable

The central feature in a write-off procedure is an analysis of past due accounts, usually done with an aged trial balance. Numerous techniques are available to collect past due accounts (e.g., follow-up letters, collection agencies), but some accounts are ultimately worthless. In this case the credit manager initiates a write-off, which is approved by the treasure. On approval, accounts receivable is authorized to write off the account. A copy of the authorization is also sent to an independent third party (internal audit) for purposes of record keeping. This is necessary because after the write-off, accounts receivable no longer has an active record of the account. Note that internal audit confirms write-offs directly with the customer to ensure that no collections have been made on written-off accounts. An employee might intercept a customer’s payment on account and then arrange for the account to be written off, so that the customer does not continue to be billed for the amount.

The above functions will be shown with a flow diagram below.

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