Book Value Compared To The Multiples Based Method In Finance Guide to Year-End Accounting of Receivables

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Guide to Year-End Accounting of Receivables

Accountants and business owners have a busy time during year-end period as multiple activities are required to close books for the financial year. I have listed some major activities related to accounts receivable (only) that needs to be done to prepare the books for year-end closure. This list is by no means exhaustive and also excludes industry specific activities. Further some activities may not be applicable for a particular kind of business.

1. Finalize Sales Invoices and recoverable works

Receivables should be finalized and bad debts should be recognized. Firms typically book an allowance for bad-debts (typically a percentage of overall receivables; the percentage is based on historical factors while taking into account current factors like economy conditions, market dynamics). Completely unrecoverable debts need to be written off. Receivables in another currency need to be marked to the current exchange rates, prevailing at fiscal year-end. Further if sales invoices/receipts are generated in a POS/CRM package, then the values in accounting package (typically consolidated daily/weekly/monthly sales) need to match the corresponding totals in the POS/CRM packages.

2. Review other revenue accounts for reasonableness

They should include only non-sales linked revenue-interest income, capital gain on asset sale

3. Review Aged Receivables with Accounts Receivables(AR)

This is an important activity as the AR balance doesn’t match with Aged balances in many small businesses using QuickBooks or other small accounting packages. This could indicate some customer payments that have not been applied against invoices or missing invoices.

4. Reconciliation of AR balances with customer statements

This is applicable for corporate and/or business customer rather than individual customers.

5. Study Sales trends for the entire year and review monthly spikes/depressions carefully to ensure no data-entry related errors are there

This is a useful activity to highlight any major blunders in booking revenues. It is useful to compare monthly values against averages to identify major variances. Also studying the sales-mix (product vs. services revenues) for logical trends helps identify data-entry errors. However if the error is smaller one (say USD 100 booked in wrong income account on a base value of USD 1000) then this method will not be useful.

6. Reconcile merchant account balances with merchant account statements and reclassify customer payments in transit

This method helps ensure that all money collected by your merchant account finally reaches your account in the time-frame they commit to.

This is just a partial list of activities that need to be done to close receivables accounts in year-end. Year-end activities should necessarily be done by a senior accountant as it is a very critical activity. These accountants can be expensive or unavailable as year-end time is a very busy time. Small business owners could look at an outsourcing solution that can provide a professional and qualified senior accountant to help them manage this critical accounting activity. However sufficient due-diligence like checking references, internal check-lists, resume check of accountants etc. should be done before deciding an outsourcing vendor.

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