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Monitoring Accounts Receivable and Recording Business Losses

It’s important for businesses to closely monitor Accounts Receivable to minimize the recording of business losses. One of the bookkeeper's crucial responsibilities is to make sure customers pay their bills: Before sending out the monthly bills, you should prepare an Aging Summary Report that lists all customers who owe money to the company and how old each debt is.

Monitoring Accounts Receivable

If you keep the books manually, you collect the necessary information from each customer account. Otherwise, if you keep the books in a computerized accounting system, you can generate this report automatically. Either way, your Aging Summary Report should look similar to this example report:

Aging Summary Report — As of May 1
Customer Current 31–60 Days 61–90 Days >90 Days
S. Smith $84.32 $46.15
J. Doe $65.78
H. Harris $89.54
M. Man $125.35
Totals $173.86 $46.15 $65.78 $125.35

The Aging Summary Report quickly tells you which customers are behind in their bills. In the case of this example, customers are cut off from future purchases when their payments are more than 60 days late, so J. Doe and M. Man aren’t able to buy on store credit until their bills are paid in full.

Give a copy of your Aging Summary Report to the sales manager so he can alert staff to problem customers. He can also arrange for the appropriate collections procedures. Each business sets up its own collections process, but usually it starts with a phone call, followed by letters, and possibly even legal action, if necessary.

Recording business losses

You may encounter a situation in which your business never gets paid by a customer, even after an aggressive collections process. In this case, you have no choice but to write off the purchase as a bad debt and accept the loss.

Most businesses review their Aging Summary Reports every 6 to 12 months and decide which accounts need to be written off as bad debt. Accounts written off are tracked in a General Ledger account called Bad Debt. The Bad Debt account appears as an expense account on the income statement. When you write off a customer’s account as bad debt, the Bad Debt account increases, and the Accounts Receivable account decreases.

To give you an idea of how you write off an account, assume that one of your customers never pays the amount of $105.75 that is due. Here’s what your journal entry looks like for this bad debt:

Debit Credit
Bad Debt $105.75
Accounts Receivable $105.75

In a computerized accounting system, you enter the information using a customer payment form and allocate the amount due to the Bad Debt expense account.

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