A bookkeeping and accounting system needs internal control procedures for accounts receivable in order to minimize the risk of fraud, error and loss.
The purpose of accounts receivable internal controls is to ensure that sales invoices are properly recorded and that customers pay promptly in accordance with the agreed terms of business.
The internal control procedures for accounts receivable checklist below acts as a quick reference, and sets out the most commonly encountered techniques available when dealing with internal controls for accounts receivable.
Internal Control Procedures for Accounts Receivable Checklist
The business should have well documented policies and procedures on accounts receivable internal controls such as credit and collection policies, to ensure that all staff understand the accounts receivable process.
Segregation of Duties
Segregation of duties, sometimes referred to as separation of duties, is an accounting internal control which means that a financial process is dealt with by at least two individuals in order to prevent error, misappropriation or fraud.
In practice the segregation of duties means ensuring that the person dealing with physical assets such as cash, inventory, supplies etc, is not the same person responsible for the recording and bookkeeping of the transactions relating to those assets.
Receive Purchase Order from Customer
- Check purchase order prices, terms, and conditions.
- Check authorization levels for order approval.
- Check the credit rating of the customer.
- Check the account balance limits.
Create a Sales Order
- Compare the sales order and purchase order
- Stamp the sales order approved.
Prepare Sales Invoice
- Prepare a prenumbered sales invoice.
- Check the accuracy of invoice calculations.
- Check the customers invoice address and promptly send the invoice to the customer.
- Independently review customer complaints about invoices.
- Separate the invoicing function from the cash collection function.
- Reconcile the goods dispatched to the customer to the quantities shown on the sales invoice.
Post the Sales Journal
- Post the sales journal from a copy invoice as soon as the transaction occurs, and file the invoices by invoice number
- Use the sales journal totals to post the accounts receivable control account in the general ledger.
Post the Accounts Receivable Ledger
- Post the accounts receivable ledger from a copy sales invoice as soon as the transaction occurs, and file unpaid invoices in invoice date order to ensure invoices are not paid late.
- Separate the accounts receivable function and cash collection function.
- Carry out random spot checks on customer trading activity and check for signs of unusual activity.
- Review credit balances on accounts receivable accounts.
- Produce an aged accounts receivable report and review the balances, particularly on large and overdue accounts.
- Have a strict credit control procedure for collecting outstanding accounts receivable.
- Review all journal entries made to the accounts receivable ledger accounts.
- Check cash settlements discounts given to customers.
- Reconcile the accounts receivable ledger with the accounts receivable control account in the general ledger.
This checklist is not exhaustive and each business must develop its own policies and procedures to suit its objectives.
By implementing and using a series of accounts receivable internal controls a business can ensure that the risk of fraud and error is reduced, and that the accounting information produced it is accurate and complete. In this way, the business can be confident in using the income statements, balance sheets, and cash flows statements produced by the bookkeeping and accounting system as a basis on which to make operational decisions.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.