Process accounts receivable: the steps in order and who does each

Accounts receivable runs from policy to ledger. Finance sets the rules. Billing records what is owed and invoices it. Cashiers deposit payments, and cash application matches them to invoices. Collections chases what is late. General ledger accounting posts the results and closes the period, and reporting draws on that closed data.

The steps in order

1. Set the AR policies. The controller or finance lead writes the rules. These cover credit terms, who may approve a write-off, when interest and penalties start, and the order in which a payment is split across fees, interest and principal. Senior finance leadership signs them off. Every later step leans on these choices, so a vague policy shows up downstream as argument.

1. Establish the receivable. A sales team, program office or contract manager sends a request saying a customer owes money. An AR accountant checks the supporting agreement and records the debt in the subledger. Any interest, penalty or administrative fee owed under the terms gets recorded at this point too.

1. Issue the invoice. A billing specialist produces the invoice and sends it to the debtor. Where cost data drives the price, the specialist pulls it from cost accounting before billing. Instalment and repayment plans get set up as recurring bills so the system generates each one on schedule.

1. Receive and deposit payments. Money arrives by cheque, cash, card or electronic transfer. A cashier or treasury clerk logs what came in and deposits it. Electronic receipts land in the bank, and someone has to retrieve the detail from the bank or the government collection system. Segregation matters here. The person handling cash should not also be the one applying it.

1. Apply the cash. A cash application specialist matches each remittance to an invoice and a customer account. Partial payments get split using the allocation order from the policy. Some receipts match nothing. Those are either miscellaneous receipts, such as user fees, or unidentified items that sit in a suspense account until someone researches them.

1. Handle returned payments. When a cheque bounces or a transfer is reversed, the specialist reverses the original application. The balance goes back on the customer account, any returned item fee is added, and the debtor is notified.

1. Process credit memos and adjustments. Disputes come in through customer service, the program office or the debtor directly. An AR analyst investigates, talks to the customer and proposes a fix. An AR supervisor approves the credit memo or adjustment before it posts.

1. Monitor and collect. A collections analyst works the aging report. Overdue accounts get calls, letters and, where policy allows, added interest and penalties. The analyst recommends when a debt should go to an outside collector or a central debt collection program, and a manager makes that call.

1. Close out or write off. Paid accounts get closed. Uncollectable ones get written off by whoever holds that authority under the policy. Some write offs trigger a cancellation of debt notice to the tax authority and the debtor.

1. Post AR activity to the general ledger. The subledger feeds summary or detail entries to the ledger. A general ledger accountant reviews the interface, prepares manual journal entries for anything the feed missed, and routes them for approval. Intragovernmental receivables follow their own settlement path through the central system and need matching against the trading partner's records.

1. Reconcile and close the period. The GL accountant reconciles the subledger to the control account and clears differences. Period end accruals and the allowance for doubtful accounts get booked. Then the period is closed and the next one opened.

1. Prepare AR reports. The AR manager produces the aging report, collection status and dispute log for internal use. External reports go to regulators, oversight bodies and, where required, credit reporting agencies. These reports are only as good as the reconciliation behind them.

Where handoffs tend to break

The gap between steps 2 and 3 is common. Requests to bill arrive late or without the agreement attached, so billing waits or guesses.

Suspense accounts grow quietly. Nobody owns unidentified cash once the day's deposit balances.

Adjustments sometimes post in the subledger without ever reaching the ledger. The reconciliation catches it, but only if someone investigates instead of carrying the difference forward.

Questions to ask the people who run it

Written procedures describe the intended process. These questions surface the real one.

• How does a request to bill actually reach the billing team, and what happens when it is incomplete?
• Which payments arrive with no usable remittance detail, and what is done with them?
• Who looks at the suspense account, and when did it last reach zero?
• When a customer pays short, does the team follow the written allocation order or apply it some other way?
• Which adjustments get made without a supervisor's approval, even informally?
• What spreadsheets sit outside the system, and who would notice if they disappeared?
• How is the decision made to refer a debt for outside collection, and has that ever been skipped?
• At period close, which reconciling items are carried forward from before, and why?
• Which report do managers actually read, and which ones go out without anyone checking them?

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.