Learning Outcomes
After reading this article, you will be able to explain the importance of receivables and payables management, describe the use and function of ageing schedules, outline effective credit control policies and collection procedures, and understand common issues leading to irrecoverable debts and disputed payables. You will gain the skills to interpret schedules, recommend control improvements, and process ledger entries in accordance with ACCA FFM exam requirements.
ACCA Foundations in Financial Management (FFM) Syllabus
For ACCA Foundations in Financial Management (FFM), you are required to understand the key aspects of managing receivables and payables. In your revision, focus closely on:
- The identification and classification of receivables and payables in financial records
- The use and purpose of aged receivables and payables analysis schedules
- The rationale and implementation of customer credit limits and supplier terms
- The process for managing overdue debts, from first reminder to legal action
- Procedures for writing off irrecoverable debts and reversing previous entries
- The impact of aged balances and credit policy decisions on financial statements and cash flow
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What does an "aged receivables analysis" show, and why is it important for a business?
- Which action is typically the first formal step a business takes to recover an overdue receivable?
a) Initiate court proceedings
b) Send a reminder letter
c) Offer a settlement discount
d) Write off the balance - True or false? Good supplier statement reconciliation reduces the risk of overpaying suppliers.
- Briefly explain what a "credit limit" is and how it benefits receivables management.
- What is the difference between an "irrecoverable debt" and an "allowance for receivables"?
Introduction
Receivables and payables represent significant daily transactions for almost every business. Effective management of these balances ensures liquidity, controls financial risk, and gives a clear view of cash flow. Ageing schedules are essential tools for monitoring overdue balances, while well-defined credit control and collection procedures protect company profits. Strong controls over payables similarly protect cash and reputation by ensuring liabilities are validly incurred and properly paid. This article examines the central techniques used to manage these functions and their implications for the financial statements.
Key Term: receivables
Amounts owed to the business by customers or others for goods or services provided on credit.Key Term: payables
Amounts owed by the business to suppliers or others for goods or services received on credit.
AGEING SCHEDULES
Ageing schedules are used to analyse outstanding balances for both receivables and payables according to how long they have been unpaid. This schedule typically categorises balances by time bands (e.g., current, 0–30 days overdue, 31–60 days, etc.). For receivables, it shows which customers are slow payers, while for payables it highlights overdue amounts owed to suppliers.
The main purposes of an ageing schedule are:
- To identify overdue accounts requiring urgent collection action
- To evaluate the effectiveness of credit policies
- To assess the risk of irrecoverable debts for financial reporting
Key Term: ageing schedule
A report that categorises receivables or payables according to the length of time they have been outstanding.Key Term: credit limit
The maximum amount of credit that a business is willing to extend to a particular customer at any time.
Worked Example 1.1
A company has the following receivables at 31 March:
- $20,000 current
- $8,000 overdue by 1–30 days
- $5,000 overdue by 31–60 days
- $2,000 overdue by more than 60 days
Question:
Which customers should the business focus on first for collection, and what risk is associated with the oldest balances?
Answer:
The $2,000 overdue by more than 60 days should be prioritised, as these accounts are most at risk of becoming irrecoverable. The longer a receivable is outstanding, the higher the chance it will not be collected.
Revision Tip
Regularly review ageing schedules when revising credit management topics—they are frequent subjects in exam questions.
CREDIT CONTROL POLICIES
Effective credit control means setting clear policies for evaluating customers before granting credit and monitoring outstanding balances. Key elements include:
- Assessing customer creditworthiness before extending credit
- Establishing credit limits and payment terms for each customer
- Monitoring adherence to terms and credit limits using the aged receivables analysis
Credit controllers are responsible for sending regular statements, monitoring overdues, following up promptly, and recommending action if debts remain unpaid.
Worked Example 1.2
A new customer requests a $15,000 credit limit, but their financial statements show current assets of $10,000 and current liabilities of $9,000.
Question:
Should the full credit limit be extended?
Answer:
No. The customer's liquidity is weak (current ratio close to 1:1), and extending a $15,000 limit risks non-payment. A lower limit or stricter terms should be set.
COLLECTION PROCEDURES FOR RECEIVABLES
When a debt becomes overdue, structured collection procedures should be followed. This usually involves:
- Sending a friendly reminder soon after the due date
- Following up with a first formal letter if payment is not received
- Making telephone contact and possibly suspending further deliveries
- Issuing a final demand before considering legal action
If all procedures fail, the amount may be written off as an irrecoverable debt, subject to company policy and authorisation.
Key Term: irrecoverable debt
A receivable identified as uncollectible and removed from the accounting records.Key Term: allowance for receivables
An estimate of receivables that may become irrecoverable, set aside to match bad debt expense to the correct period.
Worked Example 1.3
A business has a customer with $3,000 overdue by 90 days. Collection efforts have failed, and the customer has declared bankruptcy.
Question:
What ledger entries should be made?
Answer:
Debit irrecoverable debts expense $3,000, credit trade receivables $3,000—to write off the amount.
Exam Warning
Marks are often lost by confusing an allowance for receivables (general estimate) with an actual write-off (a specific bad debt). Be clear on both processes and their effects on financial statements.
PAYABLES MANAGEMENT PROCEDURES
Controlling payables involves more than paying bills. Key tasks include:
- Reconciling supplier statements with payables ledgers to detect errors or missed invoices/payments
- Ensuring only authorised, valid transactions are paid
- Scheduling payments to match cash flow needs without risking supplier relationships
Prompt attention to aged payables can help avoid late payment fees, maintain good supplier terms, and improve cash flow forecasting.
Worked Example 1.4
At month-end, a supplier statement shows $8,000 outstanding, but your ledger shows $7,500 owed.
Question:
What should you do next?
Answer:
Investigate the $500 difference. It may be an invoice not yet posted, an error on the supplier statement, or a timing issue. Reconcile before payment to avoid under or overpayment.
Summary
Strong receivables and payables management protects profit and cash flow. Ageing schedules provide early warning of overdue and risky balances. Credit control and prompt collection procedures reduce bad debts. Supplier reconciliations protect against duplicate or missed payments and support good supplier relations.
Key Point Checklist
This article has covered the following key knowledge points:
- The function and interpretation of ageing schedules for both receivables and payables
- Steps for effective credit control, including credit limits and monitoring
- The process for collecting overdue receivables and writing off irrecoverable debts
- Differences between specific bad debt write-offs and general allowances for receivables
- Procedures for supplier statement reconciliation and payables control
Key Terms and Concepts
- receivables
- payables
- ageing schedule
- credit limit
- irrecoverable debt
- allowance for receivables