Question

1. Indicate the essential functions of the accounts receivable administration and the related tasks.

Finance company

A finance company grants credits with various terms, partly on security and partly blank. Second or third mortgages are accepted as security. Collateral in the form of cars, boats and the like are accepted as well. Credits may be granted at a fixed interest percentage during the entire credit term, or at percentages which are adapted monthly to market developments.

Monthly installments are either fixed amounts or annuity determined (a fixed sum of installments and interest).

Furniture store

A furniture store sells against cash payment and on account. Sale on account is offered only to clients with a valid machine-readable charge card (badge). The store uses two systems for billing sales on account: monthly invoices or (separate) invoices for each transaction. Monthly invoices are due within one month of the billing date. The other invoices concern larger purchases and are payable in three monthly installments. The store uses a microcomputer for periodic billing and the accounts receivable administration.

Answer 1

Finance company

The accounts receivables administration is complex. Firstly the company waits for monthly instalments or annuity payments from borrowers. If the instalments are paid by account transfers, accounts receivables team ensures that credit is given to the borrower from whom payment received. If the instalments are paid by cheques, a similar credit entry to the borrower account is made on clearance of cheques. If the borrowers miss on the instalments / annuity, then their loan may be classified as NPA after certain instalments are not paid. Provision in books is made for NPAs.

The accounts receivables team deposits the post dated cheques collected from the borrower and takes legal action on return of these cheques without payment. Where the number of instalments not paid are more, the company may initiate recovery by selling the collateral security after giving notice to the borrowers.

Furniture store

Sales are made on account to clients with a valid machine-readable charge card (badge). The first control needed is that the machine readable charge card (badge) should bear the photo of the person authorised to shop based on the badge. Since badges can exchange hands quickly and may be misplaced / stolen, the photo in the badge should match the person buying the goods. Thus one badge per person should be issued and the badge should not be allowed to be used for family members not accompanying.  

Complete address and personal details (including identity proof) of the badge holder should be updated in the micro-computer before issue of the badge. Any change in address or personal details should require updating the micro-computer. The invoices should be raised on the person and address details updated in the micro-computer. A follow-up team calls up the person or visits the address in case of failure to make payments as per agreement. Post dated cheques may be collected to ensure security in case of non payment by the buyer. Sales should not be made to persons having outstanding overdue from the due date of payment. The old overdue balances should be settled before fresh sales entertained. If payment not received within the due dates, post dated cheques collected if any should be deposited and legal action taken on return of the cheques. Police should be immediately intimated if the persons shift their address without intimation.