This procedure proves that the beginning sub-ledger balance (total of all open invoices) plus the net accounts receivable invoice and payment activity for the day equals the ending sub-ledger balance. This process is referred to as balancing the sub-ledger. The balancing process can be performed at the end of each day once all activity for the day has been processed, or the following morning, if a valid sub-ledger report is run at the end of each day. To balance the sub-ledger you should perform the following steps.
1. Verify that the sub-ledger was in balance at the end of the prior day. The only way to prove that the beginning balance being used during this procedure is valid is to have already balanced the sub-ledger for the previous days activity. This proves that the sub-ledger beginning balance has a valid cutoff (that it includes all activity thru the end of the prior days processing and no activity from the current days processing). If the prior days activity is not in balance, then you must either balance it first (discover and resolve the cause), or balance the activity for the entire period since the last time that the sub-ledger was proven to be in balance.
2. Confirm that all accounts receivable payment processing and invoice adjustment activity thru the current closing date has been completed. Halt all such activity while the closing procedure is being performed. Do not process any customer payments or adjustments for dates greater than the date being balanced until the closing procedure is completed.
3. Make sure that all invoices for the current closing date have been created and that all invoice editing activities have been completed. No invoices with dates equal to or prior to the closing date should be created, edited or deleted during or after the closing procedure. No invoices with dates greater than the closing date should be created until a valid ending sub-ledger report has been produced (the actual closing procedure can be performed later as long as a valid sub-ledger report is produced). This is an important point. If an Aging is run at night and the date is correctly changed before the next days processing, then invoicing activity for the new day can begin before the balancing process is completed. Invoicing does not affect the accounts receivable control account in the general ledger and as long as the system date is correct new invoices may be created before accounts receivable personnel balance the prior day. The Aging with the valid cut off traps the sub-ledger balance before invoice activity for the current day begins, and invoicing does not update the control account. Accounts Receivable payments and adjustments should not be processed until the balancing procedure is completed.
4. Produce a valid ending sub-ledger report. Print an Accounts Receivable Aging report that includes all invoice activity through the current closing date. The accounts receivable aging report lists the current balance of each open accounts receivable invoice in your system. The invoice balances listed on the aging report are updated on an on-line, real-time basis each time an accounts receivable invoice is created, edited, paid, or adjusted. It is therefore critical that the aging report be produced after the current days invoice creation, invoice payment, and adjustment activity has been completed, and before any invoices for the next date or future dates have been created. The ending sub-ledger report is a point in time report (a snapshot of the invoices at that point in time). A valid report can only be produced if it is run at the proper time. This is normally accomplished by running the report after hours as part of the nighttime process. The report can be processed automatically by the system at night and the system date can be changed to ensure that the next days transactions will be posted using the proper date. This produces a report with a valid cutoff. Note: The system allows you to print an AR Aging as part of the Night Time Process. This allows you to invoice until the end of the day, print an aging during the night after all invoices for the date to be closed are created and before any invoices with dates after the close date are created. This allows you to balance the GL to the Aging first thing in the morning before any payments or adjustments are processed.
5. Select the Invoice Register report from the accounts receivable menu. Run the report for the date being balanced. Enter a “Y” in the “Audit Sales Posting” and “Audit Payment Activity” selections. The Invoice Register report performs a few different functions. It provides a total of the invoicing activity for the current day for use in balancing, and it also performs two types of audit on each invoice. Each invoice is audited several different ways to check for data integrity, and the balances of each invoice are compared against the general ledger payment activity against each invoice to ensure that the two ledgers are in agreement. The report used in balancing should not show any payment processing errors. If the reports do show errors they indicate posting or other system problems and the errors should be corrected before attempting to balance the sub-ledger.
6. Select the Accounts Receivable Journal report from the menu. Run the report for the date being balanced. Use the Entered Date Index Selection as this shows the actual change to the sub-ledger regardless of the posting dates used by operators during processing. The Accounts Receivable Journal report lists all activity in the accounts receivable control account in the general ledger. This includes invoice payment and adjustment activity, and it also includes check voids posted to the account. The net number printed at the bottom of the report is the change to the sub-ledger caused by invoice payment processing and adjustment activity.
7. Prepare a worksheet to prove the change in the accounts receivable sub-ledger balances (beginning vs. ending accounts receivable aging).
Daily Accounts Receivable Sub-ledger Reconciliation The following is an example of the worksheet that should be completed on a daily basis to verify that this procedure has been successfully completed. This example assumes that the AR Aging is being run at night and that sales for prior day are posted each morning.
(1) Beginning Sub-ledger balance - 7/1/07 PM $ 1,000,000.00
(From AR Aging run after all 7/1 activity was completed)
(2) Invoice Register 7/2/07 thru 7/2/07 $ 50,000.00
(3) AR Journal 7/2/07 thru 7/2/07 $ 75,000.00
Ending sub-ledger balance 7/2/07 PM $ 975,000.00
The sub-ledger report should be a verified beginning balance and should be printed in detail and preferably to file so that the file can be searched if any problems are discovered during the balancing procedure.
Review the results of the worksheet prepared in the prior step. If the beginning sub-ledger balance and the net activity for the period do not agree with the ending sub-ledger balance, then the sub-ledger and journal entry activity for one or more invoices is not equal and the invoices and the journal entries associated with them should be identified and corrected as necessary. The following procedures should be performed in order to identify the transactions or invoices causing the problem.
• Rerun the Invoice Register for the period. This report runs through the AR Invoices entered during the selected date range and audits the change in each invoice balance (sub-ledger) against the journal entries (transactions) posted against each invoice. The report will list any errors found during the audit and if errors are found, the report will print all transactions (journal entry lines) posted against the invoice showing the error. If any errors appear on the report they indicate that the sub-ledger is not in balance and you should immediately notify your system administrator so that the errors can be corrected. You will not be able to balance the sub-ledger until this report can be rerun with no errors.
• Recheck the AR Account Journal report for errors and correct them if any are listed on the report. You will not be able to balance the sub-ledger until this report can be rerun with no errors. It performs the Journal Entry to AR Invoice audit and will detect changes made to the transaction detail in the Journal Entry file that did not update invoice balances correctly in the Invoice file.
If no errors appear on the Invoice Register or the AR Journal and the sub-ledger is still not in balance, this indicates that journal entries exist for all changes made to invoice balances and that all changes made to invoices balances are recorded in the journal entry file. The cause of the out of balance condition is therefore one of the following.
• The prior period ending sub-ledger balance was not in balance at the start of the current period. In this case, you need to correct the prior period before trying to balance the current period. If this cannot be done, you must balance the entire period since the sub ledger was last proven to be in balance.
• A transaction was processed during the current period but was saved with an invalid date (given a date outside the current period) due to a problem with the system date or another reason. In this case, a transaction may have been properly posted (both invoice activity and journal entry activity for the invoice are properly posted), but either the invoice or the journal entry or both are assigned a date outside of range being audited. This will cause a problem as the invoice change will show up on the ending Aging report being used to balance to, but the journal entries (transactions) written when the invoice was created will not be listed on the AR Journal report being used to balance to (due to the fact that the transactions are dated outside the date range being selected). If this problem occurs, you can find the error by reviewing the transactions for the period using a journal entry number selection and look for transactions which are dated out of sequence. For example a transaction with a current journal entry number but a prior period entered date.
• Recheck that the prior periods are in balance. Normally this error will throw prior periods out of balance due to fact that the transaction is written to prior period and invoice was not on the prior period ending report. You can use the reproducible reports such as the AP Account Journal and Entry Register to recheck the transaction totals for dates prior to the range being balanced and see if they have been changed.
• Data Loss. If a hardware failure occurs and transaction or invoice records are lost, then the sub-ledger will go out of balance. If this unfortunate event occurs, then the audit routines can be used to help identify the missing data. The Journal Entry to Invoice audit routine (AR Journal) can identify missing invoices and the Invoice to Journal Entry routine (Invoice Register) can identify missing journal entries. If data is lost simultaneously in both files ( a rare occasion since it requires that the invoice and all journal entries for it to control account are lost) then neither of these audit routines will find the problem and the only way to identify the missing data is to compare the beginning and ending reports and prove the changes made to each invoice listed on the reports using the transactions which are still in the system and the whatever other information which is available to reconstruct the data (check copies, invoice documents, etc). You can also check for missing journal entry numbers in the journal entry file.
• Check for voided journal entries to AR control account during period being balanced. If an older invoice is paid off and the JE for the payment did not post, the error will not show up on Invoice Register or the AR Journal but the voided journal entry will show up on the Journal Entry Proof report for the period.