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KeepUP™ Blog

9/24/15 10:00 AM

The #1 Way to Deconstruct Unclaimed Property Credit Balances: Find Them 

by Greg VerMulm

If you’re looking for ways to reduce reportable unclaimed property, a best bet might be to find and resolve credit balances. Industries with high volumes of transactions are especially subject to this challenge, which is also an opportunity to reduce the amount of reportable unclaimed property and minimize both remittance payments and unclaimed property audit assessments. 

Impact of credit balances on unclaimed property

Resolving credit balances often takes lots of detective work. As a result, these balances sometimes go unnoticed, neglected or forgotten. If no formal processes are in place to manage and resolve them, they can add up to a substantial amount of business. Then, the unresolved credits age, become dormant, and turn into unclaimed property.

Worst of all, if credit balances are not controlled, they can be inadvertently left out of unclaimed property reports. Auditors are good at finding such neglected balances. The result of unreported balances is penalties and interest assessments that are clearly avoidable.

How are credit balances created?

If your company could identify all of its outstanding credit balances, you would probably take time to resolve them—right? So, the number-one most important step you can take to prevent these balances from becoming a problem is finding them. Begin by learning what types of transactions become outstanding balances.

Every industry has unique types of transactions and related balances, but all industries can learn from each other. Here are three examples demonstrating how unresolved credit balances are created.

Example #1: A customer payment does not have the requisite detail to post the payment to the accounts receivable sub-ledger. Instead of being applied to an outstanding receivable/invoice, the payment is posted and becomes a credit.

Example #2: A payment is received from a customer for a dollar amount greater than the invoice/receivable to which it was applied. This leads to a credit balance.

Example #3: A customer payment is for a dollar amount equal to the invoice. However, after the payment is applied, some of the product is determined to be damaged and unsalable. A credit is generated and posted, but not associated with the original invoice.

Industry examples of credit balances

We can’t list all industries here, but studying the outstanding balance details of other industries can give you clues to finding them in your own.

Healthcare. The healthcare industry has been targeted by unclaimed property auditors for its unique and significant amounts of credit balances. There will always be a high volume of transactions in this industry, which makes it difficult to track and resolve issues. This creates a high potential for costly posting and data entry errors that lead to problematic credit balances. Issues include duplicate payments, billing system errors, accounting errors and masking of payment sources when a provider posts all unidentified payments to a single account.

Manufacturing. In this industry, credit memo problems are common because of the way billing is completed and invoices are generated. Issues with the recording of product quantities and unsalable product commonly lead to mismatches in amounts billed and payments received. As with healthcare providers, manufacturers often have large customer bases and sell products in large quantities. The high volume of items and transactions makes it difficult to control billing and payment calculations, along with documentation critical to prove unreportable balances.

Oil and gas. This is another industry in which the nature of billing and invoices causes outstanding credits. Fluctuations in the per-unit cost of the product can lead to inadvertent mismatches in the amount billed and payments received.

How to keep credit balances from becoming unclaimed property

There’s no way to get around it. Finding and resolving credit balances takes time. A holder’s best strategy is to find ways to research and resolve the balances as efficiently and thoroughly as possible, before an unclaimed property auditor finds them. Best practices include: putting a team in place to manage this issue, reviewing unclassified payments and credits monthly to verify validity, reversing system errors, and documenting adjustments to provide an audit trail, which can save the company thousands or tens of thousands in assessments.