Bookkeeping: Setting Up the Customer Account Correctly

The customer account is at the heart of bookkeeping. When the customer account is set up correctly, you can see at any time how much you are owed by whom, when you will collect it, and which customers pose a risk. If it is set up incorrectly, however, you are left with nothing but a balance figure — and that figure answers no questions.

This article explains the decisions that need to be made when setting up your accounts receivable structure.

Accounts Receivable Card: Single Card or Separate Cards?

The first decision is how many cards to open for different transactions with the same company:

• Companies that act as both buyers and sellers. Opening a single account and offsetting debits and credits is practical from an accounting perspective, but it distorts the balance seen by the sales team. Opening separate accounts and performing the offset as a separate transaction is more transparent.
  
• Customers with branches. If the invoice is issued to head office but deliveries are made to branches, a single customer account with multiple delivery addresses is the correct setup.
  
• Group companies. A separate tax number requires a separate customer account. However, a parent group definition is required to allow the risk limit to be aggregated at group level.
  

The tax number must be the unique identifier for the customer account. Preventing the system from opening a second account with the same tax number eliminates the problem of duplicate customer accounts at source.

Due Date: Where the Balance Takes on Meaning

The total balance does not convey information on its own. If the entire 100-unit receivable is due this week, the situation is favourable; if it fell due six months ago, the situation is unfavourable. To see this:

• A due date must be entered for every invoice. If a due date rule such as ‘30 days’ is defined in the accounts receivable card, it is calculated automatically when the invoice is issued.
  
• Payments must be matched to the relevant invoice. A payment deducted from the total balance does not indicate which invoice has been settled. If matching is not carried out, the ageing report becomes meaningless.
  
• Partial payments must be supported. It is common for only part of an invoice to be paid; the system must track the remaining amount on a due date basis.
  

Risk Limit and Control

Risk management is carried out at the time an order is taken, not after a collection issue has arisen. A feasible approach:

• Define limits on a customer-by-customer basis. The limit is determined based on collateral and payment history.
  
• Ensure checks are carried out at the time of order placement. If the limit is exceeded, the order should still be recorded but placed on hold pending approval. Blocking orders entirely halts sales; failing to issue any warning increases the risk.
  
• Monitor overdue balances separately. A customer who has not reached their limit but has not paid for three months poses a greater risk than one who has reached their limit but pays regularly.
  
• Monitor guarantees. Expiry dates for letters of guarantee and mortgages should trigger alerts.
  

Cheques and Bills of Exchange

The tracking of negotiable instruments is a separate layer of the customer account. The life cycle of a cheque must be tracked: entry into the portfolio, endorsement or submission to the bank for collection, collection or return as dishonoured. The re-entry of a dishonoured cheque into the customer account should be automatic; if done manually, it is likely to be forgotten.

Including post-dated cheques in the cash flow projection is the point at which pre-accounting becomes finance.

Reconciliation

Current account reconciliation is a task that must be carried out periodically but is often neglected in many businesses. If reconciliation is not carried out, discrepancies accumulate and become impossible to resolve by the end of the year. Facilitators:

• The ability to generate reconciliation letters in bulk from the system and send them via email.
  
• Recording the counterparty’s approval or objection.
  
[*]Listing and tracking accounts with discrepancies.

Cash and Bank

The counterpart to the accounts receivable ledger is cash and bank. The automatic reading and reconciliation of bank transactions from statements is one of the features that saves the most time in accounts receivable. Transactions that cannot be reconciled must be accumulated in a separate list and cleared regularly.

In Summary

Bookkeeping is not merely about issuing invoices. Uniquely identify the customer account using the tax number, specify the payment term on every invoice, match payments with the relevant invoices, and implement risk control at the point of order placement. Once these four elements are in place, ageing and cash flow projections will function correctly automatically.

We can work together to design your accounts receivable structure using the Mekjoy’s Accounts Payable & Finance solution.