Accounts receivable is a sub-area of corporate financial accounting . This deals with the recording and administration of receivables and credits as well as the realization of the open items from the deliveries and other services of this company. This part of the financial accounting processes the current business transactions that affect the customers.
In financial accounting and business accounting, debtors are the customers of a company who purchase goods and services on account or by contract with a later due date. In these customer relationships , there are claims that have to be paid. These receivables are subject to a default risk . In order to avoid or reduce losses, the receivables must be monitored by the receivables management.
Administration of accounts receivable
As part of the establishment of business relationships with a new debtor, it may be advisable to check his creditworthiness. This is particularly useful when goods or services are sold on account on a large scale. What a larger framework is depends on the individual circumstances of the company providing it.
A check can be carried out , for example, via a credit agency.
In addition, a new debtor should provide evidence of his / her registered office (address) using suitable documents. Further relevant data must be documented depending on the circumstances. This could be, for example, a trade license, extract from the commercial register or a sales tax identification number .
In any case, it is advisable to agree a limit ( credit line ) with all debtors , up to which they may build up receivables . Even if a debtor pays all accounts receivable on time, accounts receivable may otherwise arise that represent an unacceptable risk. Such a situation would arise if a customer purchases large quantities within a short period of time.
As additional protection of the claims are guarantees or other collateral conceivable, but in most industries uncommon. The retention of title is very popular, but in practice it often causes problems. With customers who are viewed as risky, one would rather insist on cash payment in order to then later accept possibly growing receivables.
Existing customers should also be checked to a certain extent because their creditworthiness is subject to change. In particular, if the payment behavior of existing customers deteriorates noticeably, this debtor must be checked again.
Collection and monitoring
Through the systematic and complete booking of all invoices , credits , other claims (for example from damages ) and payments, all current business transactions that affect the debtors are taken into account in the company's receivables portfolio . These claims are shown on various current accounts, the customer accounts. Customer groups or individual customers can be assigned a customer account.
In addition to the display on the customer accounts, on which all movements can be seen, there is often an alternative display in the form of open items. With these open items, only open cases, such as unpaid invoices and overpayments or other credit, are then displayed. In addition to amounts, this display contains essential additional information (due dates, dunning levels, etc.) and is therefore suitable for providing a quick overview of the current balance of receivables. The total of all open items corresponds to the balance of all customer accounts.
The regular (for example, fortnightly) control of open items with regard to their due date is the preliminary stage to dunning.
After it has been established that a customer has not met his payment term, a distinction must be made as to whether this is tolerated or whether action is to be taken against it.
A tolerance is conceivable if the exceeding of the payment term was agreed or the business relationship should not be impaired for the time being. More detailed explanations can be found under point 6.2 (customer relationship) of this article.
If action is to be taken against exceeding the payment term, this can be done independently or by an external service provider via a debt collection company . Since the risk of bad debts increases with the age of the receivable, the speedy processing of the dunning process is jointly responsible for its success.
The commissioning of an external debt collection service provider is to be viewed critically insofar as its costs cannot always be successfully transferred to the defaulting payer. In addition, this debt collection service could choose a stricter tone and a more aggressive demeanor than would be desirable. With regard to demands that a debt collection service provider tries to realize, it is also difficult to keep track of the processing status.
When processing the out-of-court dunning procedure independently, it is important to clarify how many dunning levels are used. Each dunning level means an additional delay in the process and thus the receipt of payment. After a friendly payment reminder, it seems sensible to only receive another clear reminder with a clear, calendar-based payment term. If this does not lead to the desired receipt of payment, it would be advisable to contact us personally now at the latest, provided this is feasible due to the size of the dunning company and the scope of the dunning process. Such personal contact to clarify why the payment was not made often leads to faster and better results than correspondence.
The agreement of a regulated installment payment agreement often turns out to be problematic in practice, since the payment difficulties usually reappear from the second installment. The main advantage of such an installment payment agreement is that it can be combined with an acknowledgment of debt . This acknowledgment can prove valuable.
If the claim has not been settled after the out-of-court dunning process , or if no agreement has been reached between the creditor and the debtor, the judicial dunning process can be carried out. This can also be done independently or entrusted to external bodies ( lawyers , debt collection agencies ).
The independent processing of judicial dunning requires appropriate knowledge of applying for court dunning notices and dealing with dunning courts and bailiffs . This in-house processing can, however, speed up the process through a timely conversation with the responsible bailiff and possibly help to avoid undesired installment payment agreements. At the end of this procedure there is either the realization of the claim or, after unsuccessful attachment , insolvency proceedings or the affidavit . In the case of insolvency proceedings, the claim must be registered with the responsible insolvency administrator. The latter then pays a partial amount of the claim to the creditor , depending on the determined insolvency rate .
After unsuccessful foreclosure, the opening of insolvency proceedings or the submission of the affidavit, the claim from the creditor is to be written off as uncollectible. Even after the court order for payment has been applied for, the claim must be viewed as doubtful and devalued. Just as the entire receivables portfolio as part of the balance sheet creation using a general allowance in the rating should be reduced, since experience shows that all claims can not be realized.
Alternative realization of claims
Instead of in-house monitoring and collection of outstanding receivables, companies can transfer their receivables to factoring service providers. The companies then receive the amounts due, minus a fee, immediately settled by the factoring service provider. This service provider then manages and realizes the transferred claims independently.
In many companies, accounts receivable account for a considerable proportion of the balance sheet total. The income, which is the basis of the resulting receivables with the VAT that is usually associated with this , usually includes taxable profits. As long as the receivables have not yet been settled, both these and the income taxes that are likely to be incurred must be financed. This ties up equity or makes external financing with interest expenses necessary. From the perspective of liquidity , these are the reasons why avoidable receivables have a negative impact on the company's results. A timely realization of the receivables by the accounts receivable is therefore often very important for the company.
Occasionally, customers have discovered a simple and free form of financing for themselves in exceeding payment terms. In some wholesale branches this is tolerated in order to achieve customer loyalty. In addition to loss of interest, this means a significantly increased bad debt risk for the company providing the payment. Because of the question of the realization of claims, this leads to tensions within the companies between the accounting department (accounting) and the sales department, since different goals collide here. These tensions should be avoided through clear, reliable and comprehensible guidelines from management. Basically, this overdraft is very questionable from a commercial point of view and should, if it is already used, be combined with interest on the relevant claims and some form of security.
The accounts receivable form what is known as a sub- ledger , which appears on balance in the main ledger of the actual financial accounting via a collective account “Accounts receivable from deliveries and services”. When preparing the balance sheet, customer accounts that have a credit are shown separately in the general ledger. For this purpose, it is advisable to use a sub-account of "Trade accounts payable". This collective account should be texted with "Debtors with credit balances".
The open items are not an independent part of the financial accounting, but only a special form of representation of the customer accounts.
- Bernd Urban: Accounts Receivable and Accounts Payable . 2nd Edition. Haufe, Freiburg 2018, ISBN 978-3-648-11201-4 .