Carry out credit checks on prospective customers ensuring that only

Carry out credit checks on prospective customers

This preview shows page 94 - 97 out of 218 pages.

paying? Carry out credit checks on prospective customers, ensuring that only creditworthy customers are extended credit facility What is the key internal control issue of selling on credit? Employees stealing cash received from credit customers, hence ensure that the functions of cash-handling/holding and receivables accounting are carried out by separate persons (segregation of duties: asset handling/holding, authorization and recording) Once granted credit, how do we try to ensure that un-collectibles is kept to a minimum? Ensure that a robust credit control function is in place to ensure regular chasing up of settlement is undertaken and escalating written procedures exercised in connection with problem-payers. Un-collectibles arising from accounts receivables: Despite strong credit-checking procedures on potential credit customers, there is still the risk that a customer who has been supplied goods and services on credit may not pay some or all of the debt owed. As part of the internal control mechanism of the selling business, there should be a robust credit control function in place, constantly involved in chasing slow-paying customers: identifying why this is this the case, solving the problem if slow-payment is due to the fault of the selling business and taking escalating steps to collect amounts due if there is a problem paying from the customer’s perspective (phone, a few written letters at escalating seniority, visit to customers premises by selling organization representative, lawyer letters, lawsuits). G Sharples FCCA Page 13 10/17/2012
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Usually, the escalating steps of debt collection policy of the selling organization will suffice in many cases to ensure collectability in full. However, there is a chance that un-collectibility will arise for all or some of the amount of a debt. When all debt collection steps have been undertaken, but resulted in un-collectibility (customer bankrupt say or cannot be located) the cost of continued attempts to collect may outweigh the benefits and the debt should be considered for write-off (bad debt). Illustration : Year ended 31 December 2012 PepsiCo , at the year-end currently shows a debit balance on its accounts receivable control of $6,523. The debt collection procedures in connection with one credit customer owing $100 have not resulted in the customer paying their debt, due to going bankrupt and PepsiCo has decided to write-off the debt. Journal DR CR $ $ G Sharples FCCA Page 14 10/17/2012
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Making due allowance for un-collectibles; At the accounting period end, all individual debts owed by credit customers should be examined to determine any value of un-collectibles and due allowance made for them at the current accounting period end. Methods of evaluating the allowance for collectibles: 1. Percentage of sales method: The value of the allowance expense (Increase in allowance for collectibles credit balance at the accounting period end) is computed as a % or the sales revenue recognized in the income statement for the current accounting period.
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