Indiana University Non-Student Accounts Receivable Standard Operating Procedures

Transcription

1 Indiana University Non-Student Accounts Receivable Standard Operating Procedures SUBJECT: SOURCE: ORIGINAL DATE OF ISSUE: DATE OF LAST REVISION: Allowance for Doubtful Accounts and Write-offs for Non-Student Accounts Receivable Non-Student Accounts Receivable, Financial Management Services December 2004 January 2008 ARSOP NO: 2.0 RATIONALE: ASOP: To account for uncollectible receivables in accordance with Generally Accepted Accounting Principles (GAAP). All revenue producing operations should establish and use a method of bad debt recognition that includes establishing an Allowance for Doubtful Accounts. Allowance method Direct write-off method Recovery of write-offs Collection Agency Annual Reporting Requirements for write-offs Allowance Method: Required for units with average accounts receivable greater than $20,000, not including the allowance. An Allowance for Doubtful Accounts measures receivables recorded but not expected to be collected. Auxiliary organizations with average non-student accounts receivable greater than $20,000, not including the allowance, must compute and record an Allowance for Doubtful Accounts on their balance sheet. (This accounts receivable balance should be re-evaluated on an annual basis to determine reporting status.) Often, it is not known which specific accounts receivable invoices will be uncollectible. An allowance is therefore established to estimate the value of those receivables believed to be uncollectible. This entry should be recorded so the income statement and balance sheet are fairly stated at the amount expected to be collected in receivables, thus satisfying the matching principle 1. The entry creates a contra accounts receivable balance. When netted against the gross total of accounts receivable, the true value of the receivables is reported, as illustrated by the sample balance sheet below: 1

2 Computing and recording an allowance: The following method is acceptable for estimating the amount of bad debt to record each period: Step A: Use the actual write-off amount of the previous year and divide it by total credit sales in the same year. (If it has not been necessary to record write-offs on a consistent basis, a unit can average the prior three years write-offs and divide by the average credit sales for the same three years to arrive at an estimated allowance %.) Note: Last year's write-off % becomes the estimated allowance %. Step B: Multiply this percentage by the credit sales during the reporting period to find the amount for the same period's bad debt entry. Integrating the example, the correct entry is as follows: Allow. for Bad Debt (Exp) 5101 $ Allow. for Doubtful Accounts 8900 $ Adjusting the allowance: Your allowance for doubtful accounts must be reviewed for possible material adjustment on a quarterly basis at minimum. No adjustment is necessary if there is no material change in the estimated allowance value. We would also recommend that your allowance be at least equal to the balance of outstanding invoices over 120 days old. Upon review of your Allowance for Doubtful Accounts the balance may be significantly higher or lower than the actual amount of uncollectible invoices. In this case, 2

3 adjustments must be made to the allowance account so a fair representation of uncollectibles is shown. Example: Allowance for Doubtful Accounts $12,000 Estimated future uncollectible invoices $ 5,000 If $12,000 was the balance of Allowance for Doubtful Accounts at June 30th, and only $5,000 of Accounts Receivable was estimated to be uncollectible in the future, the allowance unfairly represents your future estimated uncollectible accounts. In this case, a decrease to the Allowance for Doubtful Accounts balance and Allowance for Bad Debt Expense is necessary. Allow. for Doubtful Accounts 8900 $7, Allow. for Bad Debt (Exp) 5101 $7, Example: Allowance for Doubtful Accounts $5,000 Estimated future uncollectible invoices $8,000 If $5,000 was the balance of Allowance for Doubtful Accounts at September 30th, and $8,000 of Accounts Receivable was estimated to be uncollectible in the future, the allowance unfairly represents your future estimated uncollectible accounts. In this case, an increase to the Allowance for Doubtful Accounts balance and Allowance for Bad Debt Expense is necessary. Allow. for Bad Debt (Exp) 5101 $3, Allow. for Doubtful Accounts 8900 $3, Writing-off a specific invoice using the Allowance Method: An actual invoice must be eliminated from the detail of accounts receivable when all collection efforts have been exhausted by the department. Amounts over 12 months old lacking current productive activity are required to be written off. A debit (decrease) to Allowance for Doubtful Accounts and a credit (decrease) to Accounts Receivable must be made so the receivables balance is decreased appropriately. Units using KFS Accounts Receivable: Use a Credit Memo and object code 8900 to write-off specific invoices when the allowance method is being used. Reversal of the invoice is not appropriate in this situation. 3

4 Units using Non-KFS Accounts Receivable: An invoice must be written-off within their internal system as well as in the KFS via an AVAD document. Actual write-off entry for Non-KFS Accounts Receivable users: Write off of invoice # BU dated 2/11/04 Customer XYZ483: Allow. for Doubtful Accounts 8900 $4, Accounts Receivable 8119 $4, Direct Method: Optional for units with average accounts receivable balance less than $20,000 and with prior approval from the campus. The direct method results in the write-off of an invoice directly to accounts receivable when it is deemed to be uncollectible. When the direct method is used an allowance for doubtful accounts is not set up to estimate future uncollectibles. Since the direct method does not conform to the matching principal and therefore is not in compliance with GAAP, this method should only be used when uncollectible invoices can be estimated to be an immaterial amount and the average accounts receivable balance is less than $20,000. Recording a direct write-off: An actual invoice must be eliminated from the detail of accounts receivable when all collection efforts have been exhausted by the department. Amounts over 12 months old lacking current productive activity are required to be written-off. Units using KFS Accounts Receivable: A direct write-off is accomplished via a Credit Memo using object code Units using Non-KFS Accounts Receivable: Non-KFS Accounts Receivables should be directly written-off using an AVAD document to Example: An auxiliary organization has an unpaid accounts receivable invoice over 12 months old for the amount $4,679.08: Bad Debt Expense 5105 $4,

5 Accounts Receivable 8119 $4, Units using Non-KFS Accounts Receivable and recording accrual entries: Units using accrual entries (AVAE documents) to accrue for Accounts Receivable that record Bad-Debt write-offs as above need to record the following additional adjusting entry using the AVAD document: Accounts Receivable Sales & Services 8119 $4, Accounts Receivable 1500 $4, This entry re-establishes the original receivable and income. An omission will result in a credit receivables balance and no income. This entry should only be done once amount has been removed from Accounts Receivable, for non-kfs Accounts Receivable users. Recovery of write-off: Should funds be collected at a later date, the entry to record the recovery of these funds is as follows for both KFS and Non-KFS Accounts Receivable users is as follows. NOTE: KFS Accounts Receivable users should not create a new invoice Allowance Method: To record the cash receipt: Cash Receipt Document Entries: Object Code Amount Cash (Debit Entry) 8000 $4, Accounts Receivable (Credit Entry) 8119 $4, To recognize the effect on Allowance: Accounts Receivable 8119 $4, Allowance for Doubtful Accounts 8900 $4, Direct Method: To record the cash receipt: Cash Receipt Document Entries: Object Code Amount Other Income (Credit Entry) 1800 $4, Cash (Debited overnight Do not enter) 8000 $4, Collection Agency: Should the funds later be recovered via a Collection Agency, the 5

6 entry to record the recovery of these funds is as follows for both KFS and Non-KFS Accounts Receivable users: NOTE: KFS Accounts Receivable users should not create a new invoice. Collection agency fees and charges are considered an expense of the unit generating the charges and should be charged to the appropriate object code To record the cash receipt and amount retained by the collection agency: Cash Receipt Document entries: Object Code Amount Collection Fees (Debit Entry) 5110 ($1,403.72) Other Income (Credit Entry) 1800 $4, Cash (Debited Overnight--Do not Enter) 8000 $3, Annual Reporting of Write-offs: Per Indiana University Policy VI-80, all invoices written-off during the year must be submitted and reported to Accounts Receivable on an annual basis for review by the Board of Trustees. Required Reporting: All units must submit the following: 1. Total Credit Sales for the year 2. June 30 Aged Receivables Report 3. List and justification for retaining any accounts over 12 months old without productive activity 4. Information detailing write-offs: a. Customer name & address b. Invoice number c. Invoice date d. Original invoice amount & remaining unpaid balance e. Explanation of reason for write-off DEFINITIONS: Aged Receivable Report as of June 30 should include customer name and outstanding balance, aged for current, 30, 60, 90, and 120 days. Report should be system generated by KFS accounts receivable or by accounts receivable system previously approved for use by Auxiliary Accounting in consultation with campus administration. Average Accounts Receivable should represent the sum of the prior fiscal year's twelve months accounts receivable balances divided by twelve. Materiality should be set at a level at which a user of the financial statements would not be influenced if this information were missing. Materiality should be agreed upon with campus administration for each unit individually. 6

7 Non-Student Accounts Receivable are charges billed outside of the bursar system to students, as well as charges billed to external parties by the university for goods or services. Productive Activity is having a recent (within 30 days) promise to pay, in writing and signed by the debtor, or a current payment plan in place on the account. Additionally, Non-Student AR requires that all non-student payment plans have payment activity within 90 days of the plan effective date of the payment plan, or within 90 days of the invoice aging to 365 days old, unless otherwise stated in the terms and conditions of payment plan. CROSS REFERENCE: Auxiliary Voucher Documentation RESPONSIBLE ORGANIZATIONS: All auxiliary units reporting non-student accounts receivable 1 "The matching principal means that revenues generated and expenses incurred in generating those revenues should be reported in the same income statement. Revenues for an accounting period are recognized in accordance with the realization principle. Then the expenses incurred in generating those revenues are determined in accordance with the matching principle. Thus, expenses are reported in the income statement for the accounting period in which the related revenues are recognized." (Intermediate Accounting, by Chasteen, Flaherty, and O'Conner; 1992; McGraw-Hill, Inc.; p.60). 7