Business Recordkeeping


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Receivables Accounting


Receivables deal with the payments received from your customers or clients.  If these payments are few, it's probably best to just record them in the General Journal.  The typical transaction is <date> <cash / amt+   revenue / amt- ...> <comments>, where <comments> include who paid you.

However, if you receive many payments, generally against invoices you've issued, it pays to set up a Receivables system. (Note: If your business is retail, none of this applies.  We'll talk about the handling and recording of incoming retail cash in a later column),

A Receivables system involves a Sales Journal — in which all invoices outgoing to customers are recorded — and a Cash Receipts Journal — in which all payments incoming from those customers are recorded.

Sales Journal

The typical transaction in the Sales Journal is <date> <invoice-nbr> <receivable / amt+   revenue / amt– ...> <comments>, where <comments> include customer (name or number) and any other data you may wish to record, like your sales-order-number (if you use one).

Note: Keep in mind that if you use customer numbers you will need a "key" —paper listing or computer file — associating the customer numbers with customer names, and perhaps other customer data, e.g., address / phone / fax of where you sell to, where orders come from, where payments come from, special terms you may have with them, etc.

Cash Receipts Journal

The typical transaction in the Cash Receipts Journal is <date> <invoice-nbr> <cash / amt+   receivable / amt-> <comments>, where <comments> again include customer (name or number) and any other data you may wish to record.  Note that the transactions in these two Journals — netted together —reduce to the cash/revenue transaction we showed in the first paragraph.

If you're doing paper accounting, the Sales Journal is important because it's your only sequential listing of customer invoice numbers — making it immediately obvious if any are being used for purposes you had not intended.  (The Cash Receipts Journal is equally important — in an incoming cash control sense — but we'll get into that later under Receivables Processing.)

If you're doing computer accounting, invoice-number tracking is not as important because the computer can detect missing numbers.  (But make sure you have, get, or write software that can.)

With paper accounting, the transactions in these Journals are periodically (weekly or monthly) summarized into a Receivables Ledger, by customer (see earlier article, Paper Accounting).  This lets you easily see how much each customer owes you, and whether (and how much) they're falling behind in payments.  It also facilitates compiling a Receivables Schedule for your bank (as your receivables are likely one of the important assets they're loaning you money against).

Computer

With computer accounting, it's not necessary to keep Sales and Cash Receipts transactions in separate files since recording them directly in what, in a paper system, would be considered a Receivables Ledger is much more convenient.

Essential data is <customer> <key> <date> <transaction> <invoice-nbr> <comments>.  In the Ledger, Sales transactions, receivable / amt+   revenue / amt– ... , can be distinguished from Cash Receipt transactions, cash / amt+   receivable / amt– ... , by the lead account-number of the transaction.  The computer can compile a hard-copy Sales Journal by looking for transactions that lead with the receivable account-number, and a hard-copy Cash Receipts Journal by looking for transactions that lead with the cash account-number.  And by netting the receivable and cash amounts for each customer, compile the Receivables Schedule for your bank.  Or by also looking at date, compile a Receivables Aging Statement for both you and the bank.

Note the addition of <key> to the data.  Since we have no control over customers making partial payments on our invoices, we have to provide for that eventuality.  We do so by adding a "keying" system.  Although there are many methods for "keying off" transactions, I'll describe one I've used.

One field in the Ledger file is reserved for a "key".  When an invoice (sales transaction) is first recorded, the key is left blank.  When payment of that invoice is received, a letter or number (sequential by customer) is entered into the key in both the sales and cash receipts transactions.  However, if only a partial payment was received, the key is left blank (on both transactions).  The key is not filled in until the invoice has been paid in full — and then the sales and all the cash receipts transactions that went into paying it off are "keyed off".

Shipping & Sales Tax

We showed the Sales transaction above as,  receivable / amt+   revenue / amt– .  However if you're shipping goods, you're probably billing the customer the shipping cost.  (Actually, you're billing them to reimburse you for the shipping cost your shipper billed you.  You have, or will have, in your Purchase Journal, a bill from the shipper,  payable / amt–   freight-out / amt+. )  The shipping cost you're billing the customer wants to offset your freight-out expense.  So the more typical Sales transaction — if you're shipping goods — will be receivable / amt+   revenue / amt–   freight-out / amt– .

Similarly, if you're collecting sales/use tax on the sale, that tax has to be reported and paid to the state and, to simplify reporting and audit, should be accounted separately, e.g., into a Sales/Use Tax payables-account.  So the more typical Sales transaction — if you're also collecting sales/use tax — will be receivable / amt+   revenue / amt–   freight-out / amt–   sales-use-tax-payable / amt– .

Note: The states have been complaining for years that it's unfair that companies only have to collect sales-use tax on sales in states in which they are "doing business", i.e., in which they have physical presence.  But here you can see the companies' problem — are we really going to require every small business to set up 50 Sales/Use Tax payable-accounts (one for each state) — never mind the subsequent hassle of understanding each state's rules, of paper-reporting to each state — and making time for each state's audits.  The answer to that question is — yes, we probably will — the powers-that-be believe that, with computers, it's not that big a hassle (sure it isn't!).  See why "tax simplification" might be high on the small business agenda?

Sales Allowance

What if the customer pays the invoice — except for a small amount (e.g., a few cents) that isn't worth going after?  Set up a Sales Allowance expense-account and record the transaction as,  cash / amt+   receivable / amt–   sales-allowance / amt+ . The receivable-amount matches what was owed (allowing the invoice to be keyed off) and the difference (between what was invoiced and what was paid) is expensed to sales-allowance.

Reinvoiceable

What if the amount is worth going after (e.g., a few dollars)?  Just leave the transactions un-keyed-off until you collect.

But what if the customer is a regular, keeps underpaying by a few dollars, and you start building up a bunch of un-keyed-off invoices that start becoming a hassle to you in trying to understand (and communicate) what they owe?

That's where a Reinvoiceable receivables-account can come in handy.  Simply transfer all those amounts from your normal Receivables account to a Reinvoiceable account with transactions of the form, receivable / amt—   reinvoiceable-receivable / amt+ . That allows you to key-off all those invoices — without losing sight that they're still owed.  (You just moved them into a different receivables account.)

And if you want to re-invoice the customer for these unpaid amounts, go ahead.  If they're that much out of control or into playing those kind of games, they deserve the opportunity to double-pay.  (Just remember, when/if they pay to credit the payment to the right receivables account.)

Bad Debt

What if the customer doesn't pay?  All your dunning efforts have been unsuccessful — and so has putting them into collection.  Then you write-off the invoice (or unpaid balance) into a Bad Debt expense-account with the transaction,  receivable / amt–   bad-debt / amt+ , keying off the invoice.

Note: And as we mentioned in the Payables Processing column, this is not a bad place to record overpayments,  cash / amt+   receivable / amt–   bad-debt / amt– , where receivable is the amount owed, cash the amount paid and bad-debt the overpayment.  Of course, if you subsequently have to return the overpayment, you'll have a Payables transaction,  payable / amt–   bad-debt / amt+ .

Credits

What if the customer returns the goods and you want to credit out their invoice?  Do a negative invoice (a.k.a., Credit Memo), with a transaction,  receivable / amt–   revenue / amt+ , that keys-off the invoice.

What if you want to charge them a restocking charge?  If you infrequently bill restocking charges, simply credit out only part of the invoice (i.e., less the charge), and leave the invoice open (i.e., don't key it off).  until the restocking charge is received.

However, if you regularly bill restocking charges, you may wish to set up a Restocking receivables-account,  receivable / amt–   restocking-receivable / amt+ , to track them separately — or a Restocking revenue-account, in which you credit out the entire invoice,  receivable / amt–   revenue / amt+ , and re-invoice the restocking charge,  receivable / amt+   restocking-revenue / amt– .

If you choose the latter, be sure you have a system in place that guarantees that the restocking invoice gets written.  Be very, very careful with Sales transactions that give credit (i.e., any transactions that lead with receivable / amt–) — whether they're giving credit or making corrections.  Every one of them is an opportunity for your money to walk out the door.

Receivables Summary


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