| Which accounts need to be lettered? | Accounts eligible for accounting lettering are third-party accounts (customer and supplier accounts). |
|---|---|
| Is lettering mandatory? | Accounting lettering is not compulsory. But there are many advantages. |
| What is a lettered invoice? | A lettered invoice is one that has been linked to at least one payment. Amounts awaiting payment are not lettered. |
| What are the advantages of accounting lettering? | 1. improved cash management ; 2. reduce errors and omissions in financial statements ; 3. facilitating accounting audits ; 4. making informed financial decisions. 5. the right kind of relaunch |
Accounting lettering is not one of the accounting obligations imposed on a company, but it is nonetheless a good practice to adopt. Accounting lettering makes it possible to assign a unique code to different payments relating to the same invoice, or to a single payment relating to different invoices. This control and reconciliation procedure saves both time and money. Discover all the advantages of account lettering and how to set up an accounting lettering procedure in just a few steps.
What are the fundamentals of accounting lettering?
Accounting lettering is a control procedure which involves assigning a unique code to at least two accounting entries relating to the same invoice.
For example, if a customer pays a deposit, then the balance of the invoice, each payment will be linked to the invoice. The lettered transactions are therefore credited to the customer account, to offset the debit represented by the issued invoice.
If the invoice is not paid in full, the outstanding balance is not lettered.
This simplifies accounting management by making it easy to identify which invoice corresponds to which transaction, and also makes it easy to identify outstanding receivables or even overdue receivables.
Accounting lettering and bank reconciliation are not the same thing. The purpose of bank reconciliation is to check that the movements observed in the bank account correspond to those entered in accounting account 512-Banks. Unlike accounting lettering, bank reconciliation does not take account of customer or supplier invoices.
There are two methods of lettering:
- manual accounting lettering, where the accountant assigns each entry to a given code and invoice, account by account;
- automatic accounting lettering via accounting software with lettering functionality. In this case, the software systematically reconciles entries with invoices.
As a result, automatic lettering represents a considerable time-saver, especially for companies handling large volumes of invoices and transactions.
DISCOVER OUR LETTERING SOLUTION
What are the benefits of accounting lettering for businesses?
Accounting lettering offers a number of advantages.
Firstly, this control procedure helps to improve the company’s cash management.
On the one hand, account lettering optimizes management of receivables. In fact, account lettering makes it easy to identify overdue invoices that have not been paid in full. It is then possible to act swiftly in the event of late payment, by sending out the first customer reminders. If, despite these reminders and a formal notice, the debtor fails to regularize the situation in your books, you can initiate legal collection proceedings.
On the other hand, lettering supplier invoices optimizes their payment. In this way, you ensure that your company’s invoices are paid on time, thereby maintaining good business relations with your partners. It also avoids the need to pay any penalties. On the other hand, it’s not necessarily good for the company to pay its invoices too early, when it benefits from payment terms. This could jeopardize cash flow in the event of major discrepancies with customer payments. So it’s important to choose the right time to pay supplier invoices.
In addition, implementing an accounting lettering procedure helps reduce errors and the risk of omissions in financial statements. Regular reconciliations between entries and invoices enable you to quickly identify duplicate payments, misallocations or missing accounting vouchers. What’s more, it’s much easier to correct a recent error than to go back several months in the accounting records. Accounting lettering therefore promotes the reliability of our accounts throughout the year.
This links up with another advantage of lettering accounts payable and receivable: simplifying the preparation of the annual balance sheet. Rigorous, regular control of accounts receivable and payable makes it much easier to draw up the annual accounts at the time of closing. This not only demonstrates the seriousness of the company’s accounting procedures, but also saves an enormous amount of time.
Last but not least, accounting lettering contributes to informed strategic decision-making by the Chief Financial Officer (CFO) and the CEO. They have a reliable, clear and up-to-date view of the status of accounts receivable and payable. As a result, they have a pertinent overview of the company’s cash position. They are therefore in a position to fine-tune the company’s debt collection policy, grant or refuse contractual payment terms to customers, or know when to negotiate payment terms with their suppliers to preserve working capital.
What are the steps in the accounting lettering process?
To carry out effective lettering, it is necessary to follow several steps:
- identifying the operations to be lettered ;
- matching accounting entries ;
- balancing accounts;
- verification and justification of the lettering carried out.
Identification of transactions to be lettered
First of all, it’s important to specify that accounting lettering only concerns third-party accounts. This corresponds to class 4 accounts in the general chart of accounts, i.e., 401-Vendors and 411-Accounts Receivable.
Once you’ve identified the accounts to be lettered, you need to identify the transactions to be lettered. These are :
- all cash receipts corresponding to the payment of a customer invoice;
- all cash outflows corresponding to the payment of a supplier invoice by the company.
Correspondence between accounting entries
Next, you need to match the accounting entries to the invoice in question.
To do this, assign a unique code to the invoice in accordance with the nomenclature adopted by the company. Then label the corresponding transactions with this code.
In this way, for each lettered invoice, there will be at least two accounting entries.
If you use an accounting lettering program, all these tasks are performed automatically.
Account balancing
To complete the accounting lettering control process, it is also necessary to balance the accounts.
In fact, once the invoice has been paid, the credit and debit balances of the account must balance out. Failure to do so means that a payment has yet to be made, and that there is either a customer receivable or a supplier debt.
For example, if a company issues a customer invoice for €50,000 and records a payment of €10,000 and a payment of €30,000. These two entries will be lettered. The customer account will be in debit by €10,000.
But if the customer makes the following payments: €10,000, €30,000 and €10,000, then the amount debited to the customer account (invoice amount) will be identical to the amount credited to the customer account (total amount of the lettered payments). The account is balanced.
Verification and justification of lettering
The last stage in the accounting lettering process is the verification of the letterings performed.
This is especially necessary when the company receives numerous payments of similar amounts. It is therefore essential to have proof of each lettering carried out.
Summary of the steps in the accounting lettering process :
| Step 1 | Identifying transactions to be lettered |
|---|---|
| Step 2 | Correspondence between accounting entries |
| Step 3 | Balancing the accounts |
| Step 4 |
Verification and justification of entries made |
What are the best practices for efficient accounting lettering
In order to benefit from all the advantages of accounting lettering, certain good practices must be adopted:
- maintain clear and precise documentation ;
- follow a rigorous methodology;
- use accounting lettering tools and software to automate the process;
- perform regular reconciliations.
Maintain clear and accurate documentation
To begin with, the best way to optimize your accounting letter is to have clear, precise documentation.
This applies equally to invoices and books of account.
For coding and reconciling entries with invoices, it’s essential to have a reliable basis on which to work.
Follow a rigorous methodology
If you’re manually lettering your accounts and processing a large number of entries, it can be easy to get lost.
To avoid this, you need to adopt a rigorous methodology.
All the steps to be followed should be written down in detail in a reference document. This way, even if the person in charge of the task changes, the process will be respected.
What’s more, harmonizing this process will help you save time and be efficient by knowing exactly how to proceed.
Use accounting lettering tools and software to automate the process
The easiest way to automate accounting lettering is with accounting lettering software.
The best collection software generally includes this feature, as does CashOnTime.
Using accounting lettering software linked to your collection software makes it quick and easy to update accounts receivable, so you don’t have to chase up a customer for an invoice they’ve just paid, for example. It also enables your collection team to quickly check customer accounts and identify any overdue items that need to be dealt with.
It also allows you to centralize information and gain a 360-degree view of your customer, with all current and past actions (disputes, promises to settle, notes or comments, risk evolution, payment announcements, etc.). By analyzing your customers’ payment behavior directly with the software, you gain in responsiveness and efficiency.
Ideally, you should opt for accounting lettering software that includes artificial intelligence (AI). In fact, with artificial intelligence, an accounting lettering software like CashOnTime learns from your past letterings and the payment behavior of your customers. In this way, it adapts to your specific operations by recognizing different scenarios. And for the most complex lettering operations, intelligent lettering offers a series of combinations from which your staff can choose to save even more time.
This artificial intelligence can also automatically interpret payment notices from major customers.
Perform regular reconciliations
Regular reconciliation of entries and invoices is essential for effective accounting lettering. At the very least, reconciliation should be carried out once a month. But this depends on the size of the company and the number of entries to be processed.
Here again, the use of accounting lettering software is advantageous, as it reduces the time between reconciliations. As a result, accounts receivable and payable are always up to date.
Accounting lettering is an indispensable tool for efficient financial management of your business. This control procedure benefits both the reliability of your financial statements and your company’s cash management. And for even greater efficiency, the use of accounting lettering software is highly recommended.
