As the year end is getting closer, it is also the time to start thinking about doing confirmation letters – both for accounts receivables and payables. Whilst some may think that it’s the supplier’s problem to confirm their receivables, it in fact isn’t so. It is the management’s responsibility to ascertain all assets and liabilities balances are shown in correct amounts.
However the question of who to send the letters to still remains. As most things in life and in accounting, it depends. In case where you have numerous clients with different balances from very small to very considerable amounts, it makes sense to leave out those that are very small. The same approach applies to payables balances, however please note that it only makes sense in case there are hundreds of those balances. Just decide on a limit over which you confirm all balances and make sure that those below the set limit don’t compose a considerable amount in total.
When confirming accounts receivable balances is more motivating for management as you’re confirming your assets, the best practice is to confirm payables as well. And not just confirming balances above 0, but also balances with suppliers you’ve had most dealings with over the past period even though the balance may be 0. There is no knowing of missing invoices for an example and those usually happen with parties you have most transactions with.
So, to summarize, think through what is your goal when performing this confirmation procedure – ultimately you want to be sure all assets and liabilities have been recognized in proper amount on the balance sheet. Make your selections based on identified risks and not how to get over with it easier.