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Reconciliation of Monthly Receivables
Monthly Reconciliation of Receivables Balances
If you are responsible for maintaining the records of your pumping company, you may have had the unpleasant experience of having your accountant point out discrepancies between his accounts receivable figures and your ending accounts receivable report.
Or perhaps the owner comes to you and asks for a receivables detail for a particular customer and then insists that your figures just can't be right.
These and numerous other problems can be dealt with efficiently by carrying out a month-end reconciliation of outstanding accounts. This standard of good bookkeeping is often overlooked in smaller firms as a harried staff is forced to concentrate on the many daily emergencies that seem to be a part of every pumping firm.
However, even the busiest office should make time at month-end for a thorough review. The failure rate of people's memories is exponential-it may be easy to remember a strange occurrence a few weeks ago, but it's almost impossible three months from now. If you don't get it right at the end of the month, it is likely you will never figure out what caused your figures to be unbalanced.
If we assume that the previous month was in balance with the books, then your accounts receivable report will show the same balance as your reconciliation with this amount. In the sample worksheet we use the hypothetical sales figure of $100,000. The most important changes to your receivables during the month are the total sales generated during the month ($50,000, line 2). The next most important items are the cash receipts from customers ($30,000, line 3). Since sales increase your receivables, we add them to the past balance. Cash receipts reduce your balance and are subtracted.
How you deal with the adjustment of past invoices is very important in keeping things straight. Customers may call back throughout the month to question invoices. Some of these adjusted invoices will be within the current period, and some will be for invoices which were sent out months ago. I often advise my clients in the industry to simply issue an altered invoice for changes within the current month. If you are using a computer system, reissuing invoices is generally an easy process. Your client gets a new bill, and he is satisfied.
However, for changes to invoices of prior months it is not so simple. If you just alter the invoice, then you are, in effect, changing the previous month's ending balance, and in a short while you will surely be hard put to explain the variance. You must issue credits, which are then recorded as adjustments to sales of the PRESENT month.
If you use Pumpware accounting software from Ware Systems, use the Cash Receipts screen, but note that the entry is a credit in the 'account' field. Other systems may require you to go through a credit memo process. If you keep manual records, you should keep a Sales Adjustment Ledger on a monthly basis.
Adjustments to sales are generally decreases in sales. (It's a rare contractor who will call you up to argue that the price was not high enough.) In the sample we assume $2,500 in adjustments (line 4).
Another issue is what to do with back charges-for example, the firm went to do a job and ends up being billed by the contractor ($500, line 5). The same rules for sales adjustments generally apply to back charges. I recommend, however, that back charges be treated as a separate item. These expenses are not normal, and should be watched. If they become a significant percentage of sales, something is deeply wrong with the management of the firm.
All firms have bad accounts-customers who, for one reason or another, will not pay. When it becomes obvious that these will not be collected, they must be written off, subtracted from the receivables balance. Sine line 6, $3,000.
Most firms have experienced a customer paying the same invoice twice. In most cases, you can simply notify the customer and apply the amount to another invoice. However, in some cases the customer requests refund. If the credit has been on the books for more than a month,the receivables balance must be adjusted. In this case, the adjustment is ADDED back to the receivables balance because the customer's balance is going from negative to zero-receivables are increasing. See line 7, $500.
Having made all these adjustments, we now know what the ending receivables balance should be (line 8). Compare this balance to your month-end balance in the receivables ledger. The difference is the variance which must be explained.
The most common problems arise from misstating invoices or cash receipts. Misstated items do not show up in month-end reports, yet are reflected in the ending balance. Another problem area is unrecognized changes in invoice amounts. This may be either intentional (adjustment to previous bill) or unintentional (accidentally altering a value when reviewing on-screen). In manual systems, this type of error occurs when a customer's account balance is added incorrectly or an invoice is pulled for review and never finds its way back into the unpaid invoices file.
Finding these errors and dealing with them at a time when everyone's memory is fresh lies at the heart of the reconciliation process. It takes time, but it will lower accounting costs and improve the ability of the staff to run an efficient operation. The process of checking it out and getting it right can be a monthly ritual that becomes not only pleasant but profitable. - M.N. Muench
M.N. Muench Ph.D. is the Manager of Ware Systems, which sells Pumpware Pro Series accounting software for concrete pumping companies. He may be contacted at (800) 776-5162.
| Accounts Receivable Reconciliation Report Sample Worksheet | |
| 1. Beginning Accounts Receivable Balance | 100,000 |
| 2. Sales for the Month | +50,000 |
| 3. Cash Receipts (Invoices) | -30,000 |
| 4. Adjustment to Sales | - 2,500 |
| 5. Back Charges | - 500 |
| 6. Bad Debts | - 3,000 |
| 7. Credits | - 3,000 |
| 8. Ending Accounts Receivable Balance | =114,500 |
| 9. Accounts Receivable Report Balance | 113,755 |
| 10. Variance which must be explained | 745 |
| 11. Adjustment of Invoice #1122 of previous month | 745 |
| 12. Unexplained variance | 0 |