Confirmations of receivables and payables are part of the mandatory annual inventory of assets and liabilities of a company. However, it is very important to do them more often — at least semi-annually or quarterly — with your business partners.
Confirmations with customers (receivables)
The most common short-term receivables of a company are receivables from customers. The real state of these receivables is an item that significantly affects:
- The liquidity of your company
- Operation of the business
- Business decision-making
- Preparation of future contracts
- Ranking customers by reliability
- Assessment of future liquidity
Through a confirmation with an individual customer, you align the mutual balances and reduce them to the real amount.
A common practical issue
It often happens that the invoice you issued to the customer — for some reason did not reach their accounting. Therefore, the obligation towards your company is not recorded at the customer’s side.
A confirmation ensures:
- Proof that the customer is aware of all debts
- Grounds for forced collection — if the 3-year statute of limitations has not expired
Statute of limitations — 3 years
With a signed confirmation (IOS — Statement of Balance) you are entitled to initiate forced collection proceedings and recover funds from a customer who had no intention of settling the obligation.
If the statute of limitations has expired, you are obliged to perform a write-off of receivables in order to:
- Reduce receivables to the real amount
- Make decisions based on realistic information
- Reduce the financial result to a realistic one
Direct vs. indirect write-off
For the write-off of receivables you can choose:
- Direct method — the receivable is completely deleted
- Indirect method — a value adjustment is formed
Depending on whether the conditions are met:
- The write-off expense can be a deductible expense (reducing the corporate income tax base)
- Or a non-deductible expense — if any of the conditions prescribed by the Corporate Income Tax Act is not met
That is why it is important to do confirmations more often — so you do not miss the statute of limitations deadline.
Confirmations with suppliers (payables)
The most common short-term liabilities of a company are liabilities to suppliers. It is very important to know the real state of debts your company has towards third parties.
Why the real state of liabilities matters
The real state of liabilities is significant for:
- Credit institutions when you apply for a loan
- Submitting a tender application
- Internal liquidity planning
Common issues
In practice it often happens that you have paid some obligation, but the invoice has not been delivered to you. Such an unrecorded invoice in your books:
- Does not record an expense that would reduce the corporate income tax base
- Is not a basis for calculating deductible input VAT, so at the end of the month it does not reduce the VAT liability
Thanks to confirmations you can also:
- Find invoices for services that are owed to you but have not been received
- Identify invoices that do not relate to your company
Statute of limitations on liabilities
If the 3-year statute of limitations expires, you are obliged to recognise the given liabilities as income to suppliers — in order to have a realistic state of liabilities in the balance sheet.
Need systematic confirmation of balances with all business partners? Contact Finance Plus — we handle the entire IOS communication process on behalf of the client.
