Sales Ledger is probably the most important of the various book-keeping functions for the simple reason that money cannot be received from your customers until you have invoiced them. It also generates the most vital piece of information a business needs to know how much money it is making. Without this you cannot even begin to work out how much profit you are making. In addition to this, you will not be able to determine your VAT liabilities without having an up-to-date Sales Ledger.
Yet in spite of its importance, Sales Ledger is probably the easiest and most straightforward book-keeping function. The double-entry is simple. Invoices are debited to the Sales Ledger control account and credited to Turnover. Payments received are credited to the Sales Ledger control account and debited to the Cash Book. Therefore, the balance on the Sales Ledger control account at any one time should be the aggregate amount owed to the business by its customers.
What is the Sales Ledger control account? It is a summary of the balances on all the individual customer accounts that form your Sales Ledger. It will appear as one line on your Trial Balance and go into your accounts as Trade Debtors. It is called a control account because the balance on it must equal the sum of all the amounts owed by your customers. Thus, it acts as a control on the Sales Ledger postings.
Sales Ledger is a separate module in most computerised accounting systems. You first set up your individual customer accounts and you then post invoices and payments to them. You should also be able to set up the payment terms so your system can determine whether an account is overdue or not. When a payment is posted, you have the option of either clearing it against individual invoices or treating it as a payment on account. There should be an audit trail showing which invoices have been cleared against which payments. You should also be able to view the customer account and see which items have been settled and which are still outstanding.
It is possible to produce highly detailed information on sales for your Management Accounts by allocating sub-codes to your invoices. For example, you may wish to review sales by product, brand, region or customer type. This can be done by analysing your invoices with sub-codes when you post them to Turnover. You should then be able to run reports in your Nominal Ledger analysing Turnover according to the selected sub-codes and date ranges.
VAT is dealt with by allocating a tax code to each transaction posted from the invoices. Standard rated supplies can therefore be distinguished from exempt or zero-rated supplies, as can sales to foreign customers that may be outside the scope of UK VAT completely. You may also need to identify margin scheme supplies that should be dealt with separately on your VAT return. Getting the VAT treatment right on your invoices is very important as mistakes made at the posting stage may not be easy to pick up later.
However, probably the most vital task with Sales Ledger is making sure the invoices go out on time and for the right amount. This is a fairly simple task when the goods or services you are selling are individual transactions because the invoice can be processed as soon as the order is complete. However, invoicing gets more complicated when services are continuous or spread over a protracted period. You may then need to invoice on a different basis instead, such as at the end of each month or on the completion of specific tasks.
You will need to liaise closely with the service providers in your business to ensure that your invoices pick up all time spent and that they comply with contractual terms. For example, an accountant may agree a fixed monthly fee with a client that may nonetheless vary if certain thresholds affecting the amount of work to be done are exceeded, such as sales activity. And stage payments for ongoing projects demand particular care as these are often dictated by the terms of a contract and the amount to be invoiced at any one time may depend on a variety of factors. Whatever type of goods or services you supply, you will need robust systems to ensure that all sales are invoiced correctly and on time.
Detachable remittance advices are still useful for customers who pay by cheque and enable you to allocate payments received. They are less relevant for customers paying electronically provided your invoice gives a reference to quote on the bank transfer. You could ask them to return the remittance advice too but not many customers will want to waste time and postage doing that. It is far more important to make sure your customers quote the reference when they pay electronically as it can cause you quite a lot of extra work if they don't.
On the whole, electronic payments are to be encouraged as they cut down on postal delays and bank charges, not to mention your own time handling cheques, and you should always allow customers this option by quoting your bank details on the invoice. However, you are bound to get some incoming payments on your bank statements with insufficient detail to allocate them, so it is important to investigate these as soon as they occur. Otherwise, you will end up with unknown receipts in your Cash Book and uncleared items on your Sales Ledger and it may take a lot of work to reconcile them. The same goes for direct debits and standing orders which should always quote your customer reference.
You may also need your Sales Ledger system to produce regular statements if transactions are fairly numerous. A good example of this is a stationery supplier. Customers tend to order stationery fairly frequently and pay many invoices at the same time. With credit notes for returned goods, cancelled orders and under/overpayments on previous remittances, working out how much is owed is not always straightforward. Sending a statement for all outstanding items will help to ensure that the account is kept straight and enable the customer to check items owed against their own records.
Your Sales Ledger should have a report writer capable of producing an aged debtor analysis. This is a list of all your Sales Ledger balances showing the amount owed by each customer and how old the outstanding items are. Usually this will be in a phased monthly format and the outstanding items will be allocated to the aged columns according to the invoice dates and the reporting date. You should also be able to run more detailed reports showing the complete activity on any particular Sales Ledger account, usually summarised in a monthly format based on invoice date and payment date.
However, it is no use running reports showing aged debtor balances if nothing is done about them. Credit control is rarely a popular chore but nonetheless it is an important one. Overdue accounts are often a sign that something is wrong and the sooner they are tackled the better. But you cannot deal with overdue accounts effectively unless you know why they are overdue, and you will only know this by contacting the customer and getting as much information out of them as possible. For that reason, reminder letters issued in escalating levels of severity are rarely very effective. There is only one sure way to find out what the problem is - pick up the telephone and talk to them! If no convincing reason is given or payment is not offered immediately, it may well indicate that the customer is experiencing cash-flow problems.
Overdue accounts may occur for a variety of reasons. If you are lucky it will be because someone is away, the invoice was not received or the customer was simply too busy to pay. If you are not so lucky, it will be because there is a dispute of some kind or the customer is having cash-flow problems. You will then need to decide what to do about them. Reducing the amount owed as a gesture of goodwill, granting the customer more time to pay or discounting the invoice for early payment are all ways of maintaining good relations at a difficult time that may enhance customer loyalty. However, you may feel that the customer will soon go out of business or is simply using you as a source of free credit, in which case sterner action would be required. In that situation, you need to get on their case as soon as possible and stay on their case until the matter is resolved, as the situation will rarely improve by itself. At the very least, you should consider whether future supplies should be made to that customer without payment being made up-front.
If you are very unlucky, the customer will have already gone bust owing you thousands of pounds. Of course, the whole point of credit control (and also credit checking which is equally important) is to avoid this scenario. Nonetheless, it does happen even when you have taken all reasonable precautions. In that situation, you need to cut your losses as soon as possible. Don't wait for a letter from a liquidator to arrive telling you that you may recover only a small fraction of the debt before you realise there is a problem. Find out for yourself and cease making supplies to that customer as soon as possible. And once an account has gone bad, either write it off or add it to your provision for doubtful debts straight away. At least then you will know that the profit figure in your accounts is not hopelessly optimistic.