What is a “Wash” of accounts receivable credits and debits?
An accounting “Wash” is a process of taking a series of credit and debit transactions of roughly equal dollars and mass-matching them (the “wash”) to clear the books, resulting in a zero balance. In accounts receivable, this refers to unapplied cash and credit memos vs. open customer deductions or invoices.
For example, let’s say you have a large customer with a large number of unapplied credit memos, invoices, unapplied cash, debit memos, and customer deductions. For argument’s sake, suppose you can round up 1,200 credit memos totaling $625,000, and 1,600 deductions totaling about the same amount, all un-matched for one reason or another. So the idea is to get rid of 2,800 unreconciled accounts receivable items with a journal entry, and thus reduce the aging on this account by 56 pages, apparently “cleaning up” the account.
What could go wrong?
- The customer will later deduct for many of the credit memos you are writing off and you will have to eat the loss.
- Accounts payable post auditors will request a statement of account including the credits, so they can deduct them.
- The written-off deductions could be double deducted, and you will be stuck, unable to prove it was deducted before.
- Your CPAs will have a problem with this practice, possibly delaying your audit when they find out.
- Depending on whether you sell consumers or businesses, you may put yourself in serious violation of the legal escheatment rules.
It is your responsibility as well as proper accounting practice to correctly match and apply accounts receivable debits and credits, and that is when good reconciliation is necessary. The most advanced systems, using multiple matching criteria and powerful computing, can make short work of this problem. We at Smyyth have the reconciliation service, enabled by our great Carixa technology, that is the solution to reconciliation problems of any scope or complexity.