How to reconcile accounts receivable

business.gov.au's glossary describes accounts receivable as the record of short-term customer accounts, under 12 months, that customers still need to pay. In most accounting systems it is kept in detail and in summary: each customer's unpaid invoices, and one accounts receivable account in the general ledger, which ought to match the sum of those invoices.

• The ledger check compares the aged receivables list, which totals every customer's unpaid invoices, with the accounts receivable balance in the general ledger.
• The customer check tests individual balances against what customers themselves say they owe.

If your books use cash accounting, business.gov.au points out that they don't show money owed to you. There is no ledger balance to check, so reconcile your list of unpaid invoices instead: invoices issued, less credit notes and payments received, should leave the invoices still on the list.

1. Run through the invoice numbers for the period. business.gov.au lists a unique invoice number among the details commonly put on invoices, so a missing or doubled number shows up quickly.
2. Check that every credit note issued in the period is entered against the invoice it relates to.
3. Go through the bank statement for customer payments and confirm each has been applied to the invoice it pays.
4. Set aside any deposit you can't identify in a clearly named account, and ask likely customers about it, rather than guessing which invoice it pays.

Run the aged receivables list and the general ledger balance for the same date. Where they differ, the cause is usually an entry that changed one but not the other, often a journal posted straight to the accounts receivable account.

Both journals lowered the ledger without touching any customer's balance, so those customers still appear to owe the full amounts. Reverse each journal, apply the payment to the invoice it paid, and issue the credit note. Both figures then show the lower total, and each customer's balance is right.

Agreeing the aged list with the ledger proves the two match. It doesn't prove either is right: an error that reaches both, such as a customer payment coded to sales instead of applied to an invoice, leaves them agreeing with each other. A roll-forward that also checks the month's customer receipts against the bank statement catches that kind of error.

Take each line from a record you already have: the opening figure from last month's reconciliation file rather than a fresh report, the invoices and credit notes from the month's sales lists, the applied payments from your receivables records, and the payments received from the deposits on the bank statement.

Start from the balance agreed last month, add the month's invoices, then take away its credit notes and the payments applied to invoices. Here the result, 23,920.00, matches both the aged list and the ledger, so the books agree with themselves.

The last two lines are the test that matters. The customer receipts on April's bank statements total 37,100.00, but only 36,280.00 was applied to invoices. The other 820.00 was a customer's payment coded straight to sales when the bank line was entered. That customer still appears to owe 820.00, and the sale has been counted twice: once when the invoice was raised and again when the money arrived.

To fix it, take the receipt out of sales and apply it to the customer's invoice. Receivables fall to 23,100.00, the aged list and the ledger still agree, and the customer's account is right. Next month's roll-forward starts from 23,100.00. If that figure has changed by the time you come back to it, an entry in a month you've already closed has been edited.

• Send statements to customers with open invoices, listing each invoice, credit note and payment. Customers who disagree will usually say so.
• Read each remittance advice against the invoices the payment was applied to.
• For your largest balances, ask the customer to confirm the amount they show as owing.
• Note any invoice a customer disputes, with the reason and who is following it up.

• Errors in your books: a payment applied to the wrong customer or invoice, an invoice entered twice, a credit note not entered. Correct them with the document that supports each change.
• Timing: a payment the customer sent before the date that reached your bank after it. Note it and check it arrives.
• On the customer's side: an invoice the customer never received or has overlooked, or a short payment. Resend the invoice or ask about the shortfall.
• Amounts that may not be paid: business.gov.au's glossary treats a bad debt as money that probably won't be paid any time soon. How a bad debt is handled in your accounts is a question for your accountant.

An unapplied payment is money recorded against a customer but not matched to any of their invoices. An unapplied credit is a credit note entered for the customer but never set against the invoice it corrects. Neither changes what the customer owes in total, so the ledger check can't see them. Both make the aged list misleading, though: the old invoice still looks overdue, while a separate credit sits on the same customer's account.

Before the payment is applied, invoice 1047 shows as overdue although the customer paid it on 2 April, and anyone working from the aged list could chase it. The total is 1,980.00 either way. Once the payment is applied, invoice 1047 clears and only the invoice not yet due remains.

• Match each unapplied payment to the invoices named on the customer's remittance advice. With no remittance, ask the customer which invoices it pays rather than assuming the oldest.
• Split a payment that covers several invoices across all of them. Apply a part payment to its invoice, leave the rest open, and note why it was short.
• Set each credit note against the invoice it corrects, so the two leave the list together.
• Where a payment is more than the customer owes, apply what matches and treat the rest as a credit balance, covered next.

Next, read down the aged list itself:

• A customer with a credit balance has paid more than they owe, or has a credit note not yet used. Refund it or apply it to their next invoice, as agreed with the customer.
• Invoices in the oldest columns each need a reason, such as a dispute or a payment plan, and a next step.

A negative, or credit, accounts receivable balance means more has been credited to customers' accounts than has been invoiced to them. Accounts receivable normally carries a debit balance, because it is money owed to the business: invoices increase it, and payments and credit notes reduce it. When the reductions outweigh the invoices, the balance drops below zero.

In double-entry terms, each invoice is a debit to accounts receivable and each payment or credit note is a credit to it, so a receivables balance sitting on the credit side is a sign that something needs explaining.

For one customer, the usual causes are an overpayment, a payment entered twice, money received before the invoice was raised, or a credit note for more than was left on the invoice. For the account as a whole, a negative balance can also mean invoices are missing from the books, or customer payments have been posted to receivables with no invoices behind them.

Sort the aged list to find the customers with credit balances and check each against their invoices and payments. A genuine credit is money owed back to the customer and is handled as the section above describes; a mistaken one is corrected with the document that shows what actually happened.

• Running the two reports at different dates. An aged list run today beside a ledger balance at month end will differ by everything dated in between. Check the date on each report, and run both for the last day of the period.
• Filtering the aged list. A list limited to some customers, or set to leave out credit notes or unapplied payments, won't total to the ledger. Run it for every customer and every open item before comparing.
• Editing invoices in a month already reconciled. Changing or deleting an old invoice moves last month's agreed balance, which shows up as a changed starting figure in the roll-forward. If an invoice from a closed month needs correcting, a credit note dated in the current month leaves the earlier figures as they were.
• Recording customer deposits as sales. Money received before an invoice exists, such as a deposit on an order, never meets its invoice, which then shows the full amount as owing. Ask your accountant how deposits should be recorded in your books, so each one can be matched to its invoice later.
• Leaving a small gap for later. An unexplained difference gets harder to trace as more entries pile on top of it. Find each one in the month it appears, while the documents are still at hand.

A monthly reconciliation suits a business that invoices through the month and sends customer statements at month end. Do it once the month's invoices, credit notes and bank transactions are all entered and the bank account itself is reconciled: receivables can only be as right as the customer payments recorded from the bank.

It is also worth reconciling before you send statements or start a round of follow-ups, so no customer is asked for money already paid, and before receivables figures go into a report for a lender or a buyer.

In accounting software, both reports come from the same books, so a gap usually traces back to a journal posted straight to the receivables account, or to a report run with a filter or for a different date; the work lies in running both for the same date and following up any difference. In a spreadsheet, keep one row per open invoice, with the customer, invoice number, invoice date, due date and amount still owing. Its total is your aged list, and a second sheet can hold the month's roll-forward.

File each month's work together: the aged list and ledger balance at the date, the roll-forward, and a note on every item still being followed up, with who is following it up. Next month's reconciliation starts from those notes.

business.gov.au lists end-of-year records, including lists of debtors, among the records a business must keep, and its end of financial year checklist includes reviewing who owes you money. Reconciling receivables at 30 June, the last day of the Australian financial year, means that list has already been checked against the ledger and against customers.

Keep the reconciliation with the aged list and any customer correspondence. Most business records need keeping for 5 years, business.gov.au says.