Overdue Accounts and Bad Debts (Alberta Council)

From SJA

This is a draft document.

The Need

Accounts receivable must be monitored closely because problems with customer payments may provide a warning of problems with the company's products or services. In addition, overdue accounts represent a dissipating asset - if not pursued aggressively they may become more difficult to collect.

Policy

Interest may be charged at a rate of 2% per month on all invoices over 30 days from the invoice date.

Interest charges shall be invoiced to the customer.

Charges that have become uncollectible shall be written off.

Purpose

This Statement of Policy and Procedure provides principles to be followed when customer accounts remain unpaid.

Scope

This policy applies to the Finance Department.

Responsibilities

The Administrative and Sales Departments are responsible for ensuring that:

Customers' concerns regarding invoices are addressed promptly
Customer account status' are reviewed in Unity prior to invoicing a customer. For more information refer to Extending Credit (Alberta Council).

The Finance Department is responsible for ensuring that:

Cusotmers are contacted promptly with a concern regarding their invoice
Credit status' in Unity related to a customer whose account has become a bad debt
Credit status' in Unity related to a customer whose account has become overdue by greater than 60 days is updated accordingly
A customer that is failing to pay an invoice may be charged interest at 2% per month
Overdue accounts are followed up by the Finance Department

Definitions

"Allowance for doubtful accounts" means a provision made by the company in anticipation of a standard amount of bad debt that is likely to be experienced over the course of a fiscal period.
"Contra Account" means an account which operates as an offset to another related account in order that the amounts in each account may continue to be tracked separately as well as the net effect of the two together.
"Bad Debt" means an invoices that is classified as uncollectibel in whole or in part from the cusotmer.

References and Related Statements of Policy and Procedure

Procedures

Interest on Overdue Accounts

Interest at teh rate of 2% per month may be charged on overdue invoices. Payments are due in 30 days, so interest would be charged on amounts that are unpaid 30 days after the invoice date. Interest is calculated on a compound basis.
By the 10th of each month, the Accounts Receivable Coordinator will send a statement to customers who have outstanding balances. The statement will indicate teh date fo the original invoice, the order number(s), and the amount of interest being (if any) being charged for past due accounts.
If an invoice is more that 60 days overdue from the original invoice date, it may be brought to teh attention of the Sales Department. Non-payment by customers is often indicative of a sleas or service problem that should be followed up.

Bad Debts

From time to time, a customer invoice will become uncollectible, either because the customer cannot pay or will not pay.
Where there is some reason to believe that the customer will become able to pay or willing to pay, the invoice should be aged accordingly.
If there is no reason to belive that the invoice will ever be paid, it must be classified as uncolelctibel and treated as a bad debt.
The decision to classify an invoice as a bad debt should be made by the Accounts Receivable Coordinator and countersigned by the Finance Manager.
When an invoice is classified as bad debt, the following must occur:
1. To make the allowance, an accounting entry is made to debit the bad debt expense and credit the Allowance for Doubtful Accounts account
2. Any GST recorded must be recovered by reversing the accounting entries previously made
3. Generally, the customer's credit limit is reduced to zero. It is important to maintina the customer's records even though credit is not to be granted. This enables the company to maintain a record of customers not to be granted credit.
4. Any other business underway with this customer must be reviewed by the Sales Department and appropriate action taken.

Allowance for Doubtful Accounts

At the time that receivables are booked, the Finance Department may establish an allowance for doubtful accounts equal to a proportion of total receivables expected to turn uncollectible. This is a "contra account" which reduces accounts receivable to the expected collectible amounts.
When an allowance for doubtful accounts is used, customer account write-offs are written off to the allowance for doubtful accounts. To write the account off, an accounting entry is made to debit Allowance for Doubtful Accounts and credit Accounts Receivable which will remove it from the account.
At the end of each month, the Accounts Receivable Coordinator will identify any accounts an allowance needs to be created for or written off. Journal entries will be prepared and the AFDA listing updated and reconciled. These reports will be submitted to the Finance Manager for review and approval.

Accounts Receivable Aging Report

The Accounts receivable aging report will be produced by the Finance Manager at the beginning of each week. This report will be posted on the S: Drive/Finance/Forms and Resources folder to be used as a reference for Administration in each training centre. A more detialed report will be procuded for the Accounts Receivable Coordintor which is to be used for collections for the week.
An Accounts Receivable Aging Report will be produced for month end and the Accounts Receivable Cooridator will be required to complete progess notes on all accounts 60 days over due.
The Finance Manager will review and sign off on the aging analysis and forward to the Regional Director for the sales team assistance on accounts 60 day past due. The Sales Department may identify sales or service problems that should be followed up.
The Finance Manager will investigate any account receivable that is greater than 90 days.

Attachments

None.