Accounts Receivable Narrative

7/27/2019 Accounts Receivable Narrative

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Note: This document is an illustrative example and is for information and education purposes only. It is not asubstitute for professional advice, services, nor an entity’s own internal control procedures and should no t be used or

relied on as such.

Accounts Receivable Narrative

The Accounts Receivable process covers the following sub-processes:

Payment Processing

Monitoring Outstanding Receivables

o Annual Process to Update Methodology

o Monthly Process to Post Allowance for Doubtful Account Entries

Payment Processing

Customers send payments to bank lockboxes directly. Any payments sent directly to the Company are

forwarded to the lockbox for processing. The bank enters the receipts in batches and forwards copies of

all checks to the A/R department daily. All the details are received prior to closing the A/R for the

month, so all cash is posted in the month received.

On a daily basis, the A/R Clerk posts the checks to a temporary holding program in SAP that allows the

A/R Manager to review the accuracy of the postings made by the A/R Clerk. Once the A/R Manager

approves the payment postings, the SAP system will run nightly at 11 p.m. to batch apply the payments

to A/R records, and record the amounts on the general ledger (R_CAS_1).

On a monthly basis, the A/R Clerk prepares, and the A/R Manager reviews, a reconciliation of the

lockbox cash account (C_CAS_1). Refer to the Cash/Treasury process narrative for the full bank

reconciliation process.

Monitoring Outstanding Receivables

Annual Process to Update Methodology

The Allowance for Doubtful Accounts (ADA) is calculated following the guidelines set forth in the

Corporate Credit and Collections Policy. On an annual basis, the Company updates their methodology

for the ADA. This typically occurs in January each year to allow for a timely change in any methodology

to be applied to all accounting periods through the calendar year.

The A/R Clerk prepares the allowance for doubtful accounts package for review by the A/R manager.

The methodology is based primarily on past historical information for company sales and write-off

history. The base estimate for the initial bad debt allowance percentage is calculated by dividing the

sum of historical write-offs by the sum of the total credit sales for the historical three year period.

The A/R balances at the beginning of the year are reviewed and the estimated ADA percentages for

aging buckets are updated for the current year for use in monthly entries to adjust the ADA account

balance. The A/R department has tracked historical figures and the following ADA estimates are used as

a general starting point for receivables aging:




relied on as such.

After the A/R Clerk prepares the ADA package, the A/R Manager reviews the 3-year historical data and

makes adjustments to the aging buckets to accommodate for other expected changes in the

collectability of the receivables for the current year.

The A/R Manager updates the draft ADA methodology documentation and provides it to the Corporate

Controller for review and approval. Only upon final approval by the Corporate Controller is the ADA

percentage used in the monthly accounting process to estimate allowance for doubtful account entries

in the SAP system (R_REC_2 (Significant) | C_REC_5).

Monthly Process to Post Allowance for Doubtful Account Entries

On a monthly basis, an Accounting Analyst in the Finance Department prepares a reconciliation of theA/R sub-ledger to the general ledger (R_REC_1). The Accounting Manager reviews and approves the

reconciliation to ensure that there are no differences, or that any adjusting items are properly

documented and understood (C_REC_2). This reconciliation is maintained in the Finance Department

and the package must have both preparer and reviewer sign-offs to validate the reconciliation is final.

Upon completion of the reconciliation, the Finance Department notifies the A/R Department that the

balances can be used to adjust the allowance for doubtful accounts.

Upon receiving notice from the Finance Department, the A/R clerk prints the A/R aging report to begin

preparing the monthly adjustments to the ADA estimate. The SAP system ages the accounts receivable

based on the parameters established within the system and this information is used to generate the A/R

aging report systematically (R_REC_3 | C_REC_6). The A/R Clerk prepares the monthly ADA spreadsheet

that takes the A/R aging information and applies the approved ADA percentages based on the aging

buckets. The ADA estimates are then adjusted based on the current aging information of the A/R

balances. The A/R clerk uses the ADA spreadsheet to propose a journal entry to adjust the ADA accountbalance and the ADA Expense. The A/R Manager reviews the ADA spreadsheet and draft journal entries.

Upon receiving approval from the A/R Manager, the A/R Clerk records the journal entries in the SAP

system and the A/R Manager approves the entries (R_REC_4 | C_REC_5).

IPE:

REC_IPE_1— A/R Aging Report

REC_IPE_2— Allowance for Doubtful Accounts Spreadsheet

Notes:

1. The following risks have not been mapped in this narrative as they have been mapped in

the Revenue narrative:

a. R_REV_1

b. R_REV_2

Receivable Age (in days) 1-30 31-60 61-90 >90

Estimated ADA % 2% 10% 50% 75%




relied on as such.

c. R_REV_3

d. R_REV_4

e. R_REV_6

f. R_REV_7

g. R_REV_8

h. R_REV_9

i. R_REV_10

j. R_REV_11

2. The following controls have not been mapped in this narrative as they have been

mapped in Revenue narrative:

a. C_REV_1 Formatted: Font: (Default) +Body (pt

Formatted: Normal, Indent: Left: 0bullets or numbering

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Accounts Receivable Narrative