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A small business owner may use accounting software to record their financials. Quarterly or annually, their account can download the necessary reports to file the tax returns, employee taxes, and other filings. This process is beneficial for an operation that can’t afford a full-time accounting team.
As a rule, the person handling the accounts receivable process shouldn’t be the same person doing the accounts payable. The separation of duties is to create a check and balance system.
Whether one person is doing all the accounting or two people, you need someone who understands a deductible and how to record it.
Are you looking to learn what falls under accounts receivable? Keep reading for a quick guide on where to start.
Understanding the Accounts Receivable Process
In their simplest terms, accounts receivable are the money your company receives for the product or services you sell to customers. To turn a profit, your receivables must exceed your payables.
When it comes to accounts receivable deductions, you want to keep them at a minimum. To some, these deductions are the cost of doing business. In reality, not keeping an eye on deductions can end up being costly to your company.
What Are Accounts Receivable Deductions?
Accounts receivable deductions are expenses that detract from your profits on sales. You can either lose money on the sale, or you can take a complete loss.
Examples include refunds and discounts due to defective products or the client simply changed their mind. You can incur a deduction if there is an error in billing and the client is undercharged. The opposite can also happen when a client receives an incorrect order and refuses to return the excess items.
There are three basic negative deductions:
- Intentional
- Preventable
- Unauthorized
You can also have AR deductions when you mark down items or have a sale. These deductions are not negatives, but that is commonplace in business.
How to Avoid Deductions
The best way to avoid deductions is to analyze your business sales practices. Look for ways to improve your products or services to reduce complaints or returns.
You do this by investing in deduction management. This process involves putting together a project management team that will go over your records, processes, and other data to note trends that lead to deductions.
Next, they will come up with solutions to help combat the issue. The solutions can range from outside audits to automation software that helps track transactions.
For example, instead of manually creating invoices, you can utilize software that only requires quantity. Everything else is pre-populated.
Reaching Your Bottom Line
The accounts receivable process, when it comes to deductions, is pretty straightforward. The goal is to reduce or eliminate preventable losses in revenue. Dispute resolution, deduction management, and accounts receivable software are three investments you should consider today.
We hope you found this information helpful. Continue to browse our site for more accounting and business tips.
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