How accounts receivable is usually set up in finance and ERP systems

Most ERP systems run accounts receivable as a subledger. Customer accounts, open invoices, receipts and adjustments live there. Summarised or detailed entries then flow to a control account in the general ledger. Policies sit in configuration: payment terms, matching rules, dunning levels and write-off limits.

The customer master and the subledger

Everything starts with the customer record. It holds billing addresses, payment terms, credit limits, tax treatment and the receivables account that the record points to. Duplicate or poorly maintained customer records cause more downstream pain than almost any other setup flaw. Cash gets applied to the wrong account, statements go to old addresses, and collectors chase debts that were already paid under a second record.

The subledger keeps every open item at the level of the individual invoice or charge. The general ledger sees only the control account. Users should not be able to post to that account directly, because the two will drift apart and reconciling them becomes a monthly chore.

Policies expressed as settings

AR policies are written documents, but most of them end up encoded somewhere in the system. Payment terms drive due dates. Credit limits trigger order holds. Dunning procedures define when reminders go out and how their tone escalates. Interest, penalty and fee rules decide what gets added to an overdue balance. Write-off thresholds set who can clear a small residual without approval.

When the written policy and the configured setting disagree, the system wins in practice. Checking both is worth the effort before any change.

Receiving and applying cash

Payments arrive through bank statement files, lockbox services, card processors, direct debit runs and the occasional cheque at the front desk. Deposits are recorded first. Application to invoices is a separate step, and that separation matters.

Auto-matching uses rules: invoice number in the remittance, exact amount, customer reference, or some combination. What the rules cannot match lands in an unapplied or suspense bucket for someone to work by hand. Payments with no clear link to any customer or agreement may be treated as miscellaneous receipts.

Some organisations, especially in government, define an allocation order for partial payments. A common sequence clears penalties first, then administrative charges, then interest, and only after that the principal. This needs to be configured explicitly or it will be done inconsistently.

Returned items, such as bounced cheques or reversed direct debits, need their own transaction type. Reopening the original invoice and recording any return fee should happen together.

Credit memos and adjustments

Disputes, pricing errors and returns produce credit memos. A well-run setup ties each credit to a reason code and to the invoice it corrects. Approval workflows usually depend on amount and reason. Without reason codes, nobody can later explain why revenue was reduced.

Monitoring and collections

Ageing reports group open balances by how far past due they are. Collectors work from these, often through a collections worklist that ranks accounts by risk or balance. Contact notes, promises to pay and dispute flags should be stored on the customer account so the next person can pick up the thread.

At some point a debt stops being worth chasing internally. The system should support referral to an outside agency or a central debt collection service, then eventual write-off and closure of the item. Provisions for doubtful debts are often calculated from ageing data and booked as a journal at period end.

Posting to the general ledger

AR transactions post to the ledger either in real time or in scheduled batches. Account determination maps each transaction type to revenue, receivable, cash, discount, bad debt and fee accounts. Manual journals touching receivables should be rare and routed for approval.

At month end, the subledger is closed for the period, the control account is reconciled to the open item report, and accruals or provisions are recorded. Year end adds the work of rolling balances forward and confirming nothing posts to the closed period.

Reporting

Standard outputs include ageing, days sales outstanding, cash collected against forecast, dispute volumes and unapplied cash. Public bodies often have extra obligations: periodic receivables reports to a central treasury, referrals to credit bureaus and debt cancellation notices to tax authorities.

Where one government entity bills another, the receivable may be settled through a central clearing mechanism. In that case collection data is retrieved from that service, and both sides reconcile their balances against each other.

Questions to ask the people who run it

• When a payment arrives with no remittance, what actually happens to it, and who decides where it goes?
• How much sits in unapplied cash right now, and how old is the oldest item?
• Are there spreadsheets kept outside the system to track disputes, promises to pay or write-offs?
• Which customers get treated differently from the configured terms, and who approved that?
• When was the dunning setup last changed, and does anyone override it by hand?
• How is a bounced payment handled, start to finish?
• Does the control account reconcile to the subledger every month without a plug?
• Who can create or edit a customer record, and how are duplicates found?
• What do collectors wish the system did that it does not?

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.