Management of accounts receivable is important because the timing of receivables is a major factor in the company's cash flow. Reconciling the individual customer account balances with the general ledger balance establishes the accuracy of the balance sheet asset. The reconciliation should be done at least monthly as part of the month-end closing procedures so any adjustments needed can be included in the correct period. Where possible, the reconciliation should be checked and signed off by another member of the staff.
When you sell goods or services to customers on credit, the amounts they owe your business make up the accounts receivable balance in the general ledger. Their individual balances are found in the subsidiary sales ledger and listed in the aged accounts receivable report. Reconciling accounts receivable means that the total of the individual amounts due from debtors equals the balance of the accounts receivable account in the general ledger.
Verify the general ledger accounts receivable balance, starting with the balance brought forward from the previous period. Add the total of all invoices issued from the sales day book and deduct any credit notes. Deduct the total payments received from customers, taking the figure from the cash book, and add any finance charges made. If you post open credits (overpayments or advance payments from customers) to a separate general ledger account, the total at this point should be the same as the accounts receivable balance. Deduct open credits and add open credit refunds. Check the final figure against the total of individual customer balances from the aged accounts receivable report.
Any difference between the two balances must be investigated. Common reasons for discrepancies are journal or adjusting entries made directly in the general ledger and not reflected in the subsidiary sales ledger or vice versa and differing cutoff dates of the reports used. Other possible errors are incorrectly offsetting customer and supplier contra accounts and posting to the wrong general ledger account.
When you've identified all the errors, make the adjusting entries needed for the accounts to reconcile with the correct balances. Include a clear description of the reason for each transaction for auditing purposes. Where possible, reverse the incorrect entry and repost it correctly, rather than posting the difference only, to make the transaction easier to follow. When all entries have been made, reconcile the balances again as a final check.