Introduction
This course is about helping you with the confirmation letters procedures when it comes to accounts payables. Our aim is to start with explaining what we’re on about first and then move onto composing one, performing the procedure and also explaining the importance of it.
We aim to help you with the whole procedure to ensure you know what you’re doing, why you’re doing it and, equally important, how you do it all. We’ve also prepared a template to further help you with following the course and obviously in helping you to prepare your own confirmation letter.
The course is laid out in a logical order and written so it’s easy to understand, with simple words and “down to earth” style.
But enough about that, let’s kick off!
Downloads
Confirmation letters – AP (.pdf)
Confirmation letter template AP (.doc) | (.docx) | (.odt) | (.pdf)
What’s a confirmation letter?
A confirmation letter is something you send to the other party to get your balances confirmed. Yes, the other party gets his or her confirmed just as well, but that’s not your concern.
In essence your aim with the letter is to make sure your balances are correct – they’re against right party, in the right amount and in the right period. Something you wont get with the letters however is a confirmation that all balances are recognized. If you have a 0 balance it’s up to you really if you decide to send the letters or not, but generally speaking you will not get a confirmation from your part if the balance is zero or non-existent even.
The latter is something that comes out if the other party is also performing confirmation letters procedure and decides to send out letters. Only then can you know of balances that are not recognized in your accounts.
How to compose one?
A confirmation letter is actually in the form of a letter – it has the addressee field and the content. What’s more, it’s also nice to put it all on your company’s letterhead.
Anyway, when starting to compose the letter you start off with the addressee you are making the letter out to. Once that’s done, you move onto explaining what’s the purpose of this letter and why you’re doing it. It’s very general, but a nice introduction to enlighten the respective party why they’re receiving such a letter from you.
From there you move onto more detailed section, which is the date you require information for and your accounting information you require to be confirmed. It’s the amount according to your records that you’re stating and it should be clearly enclosed that it’s “according to our accounting records” or in similar wording.
As such, please keep in mind that enclosing a clause “if you do not reply to the letter, we assume our balance is correct” or similar isn’t really the best practice. Why? Truth of the matter is that not always the letters reach them or they may forget replying. It’s real situations that happen and as such assuming automatically that they agree with the balance is premature.
And then you add the sentence where they can confirm their balance. In essence what you do is simply add a sentence where the respective party confirms they owe stated amount to your company at a certain date.
What’s to follow is two things – the credentials of the person confirming the owed balance and area for comments if need be (i.e. in the case the balance does not agree their records). How to deal with comments is something we’ll focus on in our next section that’s about the procedure itself.
And that’s really it when it comes to the letter itself. You have our template to help you with visualizing how it looks like and also to give you a template to build your own letter upon.
How to continue with the procedure?
Your first course of action was preparing the letters. Now that the letters to appropriate parties have been prepared (note also that the names and amounts are correct on the letters as well as the dates the balances are confirmed as at), we can move onto the next steps.
List of letters sent out
Prepare a list of all the letters sent out – supplier’s name, the balance on the letter and the date the first letter was sent. It’s the minimum to ensure you’ve got some base track record of what was done. It’s the list you can edit comments in if need be, make a new column for additional letters or contact with the client (i.e. by e-mail or phone).
Dealing with responses
Most importantly it’s also the list within which you can keep track of all the replies received, balances confirmed, balances not confirmed etc. Essentially if a reply is received and it’s a confirming reply, you can make a separate column with a respective remark (i.e. “confirmed”, “agreed”, “ok” etc.) or simply colour it accordingly.
Suppliers send their confirmation letters
Confirming assets is far more important so something that’s most definitely done by suppliers is sending out accounts receivable confirmation letters.
In case you receive the letters before your own procedure there’s no reason to resend your own confirmation letter to those suppliers. What you should do is merely reply with your balance (either agree or disagree and leave comments in such a case).
Provided you’ve already started with your procedure, prepared the list, the letters and also sent them out there isn’t much that differs in such a case really. Answer with your reply and consider the confirmation letter to be also included as a part of the list to indicate that essentially an answer was received.
What if the balances do not agree?
In case your supplier has left comments stating the balance does not agree with their records there’s a bit more you have to do.
Essentially the first thing you’d have to do is gain an understanding why the balances do not agree – either there are invoices missing, some booked into wrong periods, typos etc. There are various reasons and it’s something you have to figure out now together with your supplier.
Once it’s known what caused the balances not to agree, it’s time to remedy the conflict. If there are invoices missing, they should be resend and the balances amended accordingly by the party who didn’t have the invoices. If there are typos, those should obviously be corrected etc. Effectively the aim is to make all the amendments and adjustments into the proper period and not leave anything just as it were – “we have a mistake in our accounts and we’re going to rectify it in the next period”. No. It’s to be done in the period, which accounts you’re confirming.
Summarizing the results of the procedure
Remember you made the list? This list is your overview of how many replies you’ve received, which were “okay”, which did not agree and actions taken with balances not agreeing.
Something you have to decide now is, in case you have some balances you’ve not received a reply for, how to continue with them. Say that you’ve tried to call them, sent them e-mails and even resent the confirmation letters. Nothing. Not a single reply or action to follow promises given (i.e. “we will send tomorrow” etc.) What to do in such a case? At the end of the day it’s your judgement call. If it’s a significant balance you can always continue and follow-up. If the balance is insignificant you may drop the matter more quickly.
At the end of the day it comes down to the simple fact that you pay what you owe according to your records. If you’re not sure you owe anything really and your balance is most probably including some false info or you know some invoices are missing etc. you may find yourself more eager to get a confirmation obviously. As we said, it’s your judgement call and it depends hugely on the situation really.
Importance of it at the end of the day
Confirming your payables is in essence making sure liabilities you’ve recognized in the accounts in fact do exist and that they are in the correct amount.
What you want to ensure is that all expenses have been accounted for in the right period and that there aren’t invoices lurking to surface in the next period only to increase this period’s expenses when they should’ve been recognized in prior periods. That’s the key thing you ensure with the payables confirmation procedure – all expenses have been properly accounted for. It’s obviously both ways – balances are correct and expenses accounted. That’s what you aim with payable confirmation procedure.
Something to think about when it comes to accounts payable confirmation procedure is sending letters to those with whom the balance is zero. A good practice is to send the letters those with whom you’ve traded significant amount of goods during the period. Why? Significant amount of transactions is in essence a risk that not all invoices have properly been accounted or some may be missing. We’d strongly advise sending confirmation letters to those suppliers even if the balance is zero or insignificant.
Wouldn’t you want to know if that’s all your expenses for the period or if there’s something you had no idea about?