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Chapter 6 – Controlling Accounts Receivables

Question 1. Are credit checks performed before terms are granted to customers? Describe the process.

Conducting credit checks is highly recommended prior to setting terms granted to customers. In this way, the business owner would be able to prevent bad debts that would affect the company’s financial status.

To do so, the business must run a credit check on customers. Some private institutions provide credit services wherein they run background checks on individuals. The business may opt to charge customers with a credit check fee and then have them fill in forms where the customers consent to having a credit check run. After the results of the credit check, the business may then decide whether to transact with a customer. If they agree to a transaction, the business sets the terms depending on the customer’s credit background, particularly his or her ability to pay for rendered products or services.

Question 2. What type of sale agreements do you have in place, which are signed before the sales takes place?

Prior to signing the contract, agreements during sales include policies on return and exchange, the purchase price, the description of the product or goods being sold, warranties, description of how the goods will be delivered, and other notes agreed upon by the buyer and the seller.

Question 3. What is your Accounts Receivables turnover?

The Accounts Receivables turnover must be high for the business to ensure that it does not incur bad debts.

Question 4. What is the procedure to receive payments from customers including the receiving of the mail, opening the mail, recording the transactions, and making deposits into the bank?

To receive payments from customers including the receiving of the mail, opening the mail, recording transactions, and making deposits into the bank, the business owner should have initially recorded the terms of the receivable during the time of sale. After receiving and opening the mail, the transactions must be recorded using invoices. After keeping track of the flow of cash through invoicing, the receivables may be forwarded to the auditors and accountant. The business owner would then make a decision on how it would be deposited in the company’s bank.

Question 5. Describe the procedure the company follows when receiving payments from customers. What documents are verified to insure payments match the invoice sent to customers?

When receiving payments from customers, the business verifies the term of receivables agreed upon between the business owner and the customer. To insure payments match the invoice sent to customers, records such as the aging schedule and the general journal may be used to check the invoice using the records.

Question 6. Is there an aging process for all Accounts Receivables accounts to better control receipts from customers and to collect from overdue accounts?

Establishing and maintaining in aging process for all Accounts Receivables accounts are recommended for the start-up business. In this way, the business is able to keep track of all receivables that must be collected within a specified period of time.

The Aging Schedule provides important information on the specific amount of Accounts Receivables, the customers from whom to collect Accounts Receivables, and the duration of collection. Hence, maintaining an aging schedule would help the business identify Accounts Receivables collected as well as those that were not collected.

The Aging Schedule also helps the business keep track of customer patterns of bad debt. Through the Aging Schedule, the business may determine if the customer has repeatedly failed to pay for services rendered. As a consequence, the business may refuse to cater to customers that incur bad debt in the future.

Question 7. What is an evidence of debt?

The business may ask customers to write a promissory note in the event that they are unable to pay. Through the promissory note, the customers set a date and time for their payment, and terms if they fail to pay within the set deadline.