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ACCOUNTS RECEIVABLE AND UNCOLLECTABLE DEBT POLICY
Policy: Effective April 15, 2025
City of Santa Maria Accounts Receivable and Uncollectable Debt Policy
I. PURPOSE:
The purpose of this policy is to establish the responsibilities, internal controls, authorizations and procedures for the accurate and timely preparation of customer invoices for goods and services rendered by the City Santa Maria (City) and the management of the accounts receivable created by these invoices including t he authority to write-off uncollectible accounts. This includes ensuring adequate support for all amounts billed, timely collection of outstanding amounts, recording of transactions, reporting of outstanding accounts and ensuring that practices are consistent throughout the City.
II. GOALS:
The goal s of this policy are to improve the accuracy of measuring outstanding accounts receivable, ensure that reasonable diligence is used to collect outstanding accounts receivable, and write -off uncollectible debts from the City’s financial system. This will be facilitated by the following:
1. The policy will name parameters for accurately reflecting the value of accounts receivable.
2. This policy will name the parameters by which overdue accounts receivable will be sent to collection agency/services.
3. This policy will set up the process by which the Finance Department will direct that specified accounts receivables shall be subject to write -off, to ensure that accounts receivables are not overstated. The write -off process is a critical part in accurately valuing accounts receivables. Following Generally Accepted Accounting Principles (GAAP), the City has established an allowance for doubtful accounts as an estimate of the amount of those outstanding accounts receivable which are not expected to be collected. The allowance for doubtful accounts shall be recalculated and adjusted by the Finance Department each fiscal year on an annual basis.
III. SCOPE:
This policy applies to all City departments processing accounts receivable and should be used in conjunction wi th the City’s cash handing policy and adopted policies on the application of late fees and penalties. Types of receivables covered by this policy include but are not limited to: certain delinquent items in regards to utility billing, business license tax; transient occupancy tax; regulatory and
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development impact fees; fees for services; recovery for damage to City property; fines and penalties; benefit payments, rents and leases; contract payments ; and, legal judgments.
Exceptions to this policy include legal requirements or specific contractual agreements. Departments that engage third party accounts receivable processing companies to generate invoices and process payments on behalf of the City may follow different procedures to optimize collection efforts with prior approval by the Finance Director and the City Manager
IV. GENERAL:
1. Definitions:
Account Receivable: means a claim for money, goods, services and other non -cash assets. These are generally established via billing advice/invoice or contract/agreement. These are set up as assets of the City and recognized as revenue is earned.
Allowance for Doubtful Accounts : is a contra account on the balance sheet associated with Accounts Receivable based on Delinquent Accounts. The credit balance i n this account comes from the entry wherein Bad Debt Expense is debited. The amount in this account is based on a regular aging analysis of Accounts Receivable and/or specifically identified Doubtful Accounts.
Authorized Person : is an Employee who has been granted the authority to perform specific duties or make decisions within the scope of their designated responsibilities.
Bad Debt Expense : When an Allowance for Doubtful Account is credited, the expense is recorded to an operating department. Where known and identifiable to a department , the expense for the bad debt is charged to the operating department.
Billing Advice : means an internal document used to generate an Invoice to a customer.
City Manager : means the person appointed by the City Council to perform the responsibilities in the City’s Charter and Municipal Code. City Council: is the legislative body of a city and is made up of elected officials who create policies and laws for the community . Council members handle ensuring that laws and polici es serve the needs of the people who live and work in their district.
Collection Agencies : are businesses set up to collect past -due Accounts Receivable on behalf of creditors and appointed by the City to collect these amounts.
Debtors Watch List: means a list of individuals and/or businesses that are in arrears to the City or have had a balance written off that is
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utilized by staff to collect outstanding debts. Customers on the list may be barred from conducting future business with the City until their accounts are fully settled.
Delinquent Account: means an Accounts Receivable that is late or overdue on payment.
Doubtful Account : means an Accounts Receivable for which collection efforts are in progress or have been exhausted without successful collection and for which an Allowance for Doubtful accounts adjustment will be recorded.
Due Date: means the last date by which an invoice must be paid by a customer following the terms of payment on the Invoice. Dunning Letter: means a communication to a customer showing that a payment is overdue.
Director of Finance: is the person appointed by the City Manager to that position who will be responsible for the duties outlined in Municipal Code Chapter 2-7.
Good Standing: means a customer with an Accounts Receivable that is current meaning that payments are made following the payment terms indicated on the Invoice.
Interest Charge: the charge calculated on outstanding amounts from the due date, following the City’s Municipal Code.
Invoice: means a document requesting payment from an external customer for goods or services provided by the City to the customer. Repayment Arrangement : means a written and signed repayment arrangement, authorized following this policy, negotiated with a customer for repayment of a past due amount and which may or may not include repayment of Interest Charges.
Standard Payment Options : cash, cheque, certified cheque, credit card, debit card and Electronic Funds Transfer.
Statement: means of communication issued to the customer detailing the previous month’s balance and current month’s transactions including any Interest Charges.
Write Off: means to remove an Account Receivable that is thought uncollectible from the City's financial records.
2. Write-Off Authorization Thresholds:
Write-Off Authorization Thresholds
City Council Greater than $50,000
City Manager $ 15,000 to $50,000
Finance Director Up to $15,000
V. ROLES AND RESPONSIBILITIES:
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1. City Council is responsible for:
Approval of all non-collectible accounts receivable write-offs of the City over $50,000, plus any related interest or penalties on a per account basis.
Approval of accounts receivable adjustment of amount more than $50,000 per invoice.
2. City Manager is responsible for:
Approval of all non -collectable accoun ts receivable write -offs up to $50,000 plus any related interest or penalties on a per account basis. Approval of accounts receivable adjustment amounts more than $15,000 to $50,000 per invoice.
3. Finance Director is responsible for:
Approval of all non-collectable accounts receivable write -offs up to $15,000 plus any related interest or penalties on a per account basis. Approval of any accounts receivable adjustment up to $ 15,000 per invoice.
Submittal of a non-collectable accounts receivable write-off request report to City Council or City Manager following the guidelines established in this policy.
Recommending the choice of a registered collection agency as required.
Directing the review of this policy, at a minimum every five (5) years, or sooner if required, and recommend updates as necessary.
4. Finance Department is responsible for the:
Daily management of the staff delegated accounts receivable duties. Timely and accurate delivery of invoices to customers. Timely and professional c ommunication about collections to customers occur.
Collaboration with departments and legal services in collection efforts. Identification and recommendation of accounts to be determined as uncollectable and written off.
Approval of the accounting adjustments taking into consideration the appropriate authority as provided in this policy.
Transfer of accounts receivable to third -party collection agencies as approved by appropriate authority per this policy.
On an annual ba sis, prepare an analysis of outstanding accounts receivable and develop a proper estimate for the allowance for doubtful accounts.
Facilitate Reports to City Council and/or City Manager for all internal requests to begin legal action for the recovery of accounts receivable.
5. Collection Agency is responsible for:
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Debt recovery by contacting debtors to inquire about their payment status and negotiate payoff deadlines and payment plans. Handling customers’ questions or complaints and send ing bill reminders through emails or letters.
Ensure that all collection activities follow relevant laws and regulations. Reporting the status of collections and any issues met to the City on a regular basis.
VI. SEGREGATION OF DUTIES
Segregation of Duties (SOD) separates roles and responsibilities to ensure that an individual cannot process a transaction from initiation through to collection without the involvement of others and thereby reduces the risk of fraud.
Segregation of Duties is achieved for accounts receivables by the following duties being undertaken by different individuals:
The billing for goods and services is started by an employee in the operating department responsible for delivering the goods and/or services. The accounts receivable billing request is sent to Finance to process.
Finance will create the invoice based on billing request s. The invoice should be prepared or approved by an alternate employee. Payments should be accepted and posted by an alternate employee. Adjustments to customer accounts are recommended by staff and require approval by an alternate employee.
Collection steps are performed by the operating department, finance and legal services.
In situations where it is not pract ical to meet the minimum requirements listed in this policy, the Department Director shall discuss with the Director of Finance, or designee, proposed alternative procedures and mitigating controls, such as increased supervision, job rotation, or regular review of transact ions, that can be established within existing staffing limitations.
VII. PROCEDURES:
1. Accounts Receivable Procedures:
All accounts receivable shall be entered in the finance system by Finance staff who have been delegated th e responsibility and access to the accounts receivable module. Each account receivable must be recorded and maintained
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until payment is received or the recorded amount is written off. Staff will generate an invoice and /or monthly statement to the debtor to remind them of the outstanding balances of the debt, with a concise description of the debt, and the due date.
2. Payments:
Payments may be in the form of cash, checks and credit card. Payments can be made in person, by mail and online. Payments will be applied to accounts receivable as per the Debtor’s instructions. If no instructions are provided, the payment will be applied against the oldest outstanding account receivable and interest noted on the Debtors’ statement. Any remaining credit balance will be applied in order of oldest to most recent arrears at the City’s discretion. Payments will be accepted following the City’s Cash Handling Procedure and relevant accounts receivable and collections policies , ensuring proper segregation of duties.
3. Returned Checks:
The Treasurer’s Department shall notify the originating City department upon receipt of a r eturned payment due to Non -Sufficient Funds (NSF) . The City department will follow up with the customer to recover the payment along with any associated NSF fees. Accounting will also be notified of all NSF checks so all adjusting entries can be entered into the financial system.
4. Billing Adjustments:
When an error has been made in an original invoice or it becomes necessary to adjust a customer’s account, the originating department must send an Accounts Receivable Adjustment request to the Finance Department . The request must indicate the nature and amount of the adjustment required providing the authorization for finance staff to post the correcting billing adjustment.
5. Reporting:
On a monthly basis, Departments will review aging reports and make reasonable efforts to collect all outstanding debts. Those efforts should, at minimum, be contacting the debtor and verifying that the address and phone number on file are correct, as well as steps for repayment. These reports can act as a debtors watch list which can assist departments in determining if customers should be barred from any future business with the City until their debts are settled. This proactive approach ensures that all efforts were made to
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recover debts while keeping accurate records and facilitating communications with debtors.
If the debt is not satisfied by the debtor within 120 days of its due date, the Finance Department or the Department responsible for the receivable will start Accounts Receivable Write-Off Authorization.
The timely identification of outstanding revenue owed and/or losses is essential element in accurately measuring the value of the City’s assets.
6. Business Licenses:
The exception to the section above is business licenses that are past due, they will be charged a penalty of 10% per month up to a maximum of 40% of the license tax. Any business license not paid by the fifth (5th) month will be sent to the collection agency. These billings are not normally written off, as they pertain to future dates, type of business and on a variable tax structure. If a customer notifies the City or the collection agency, that they are no longer conducting business within the city, the date of the closure will be compared to the license period of the billing. If the date of the closure falls within the license period, they will still be obligated to pay for the business license tax. If the date of closure is prior to the business license period, then the account will be closed, and no further action will be taken.
7. Customer Statements:
Customers have 30 days from the statement date to ensure timely payment with no late fees assessed, unless a date is specified differently in an individual contract.
1st Overdue Notice : over 30 days; notice statement, late fees, penalties and/or interest assessed.
2nd Overdue Notice: 60-90 days; late notice statement; added fees, penalties, interest
Collection and/or Legal Notice: 90 days and over. Submit an account to Collection Agency for revenue collection or Legal Department to initiate legal proceedings.
8. Late Fees/Interest/Penalties:
Customers with delinquent accounts more than 30 days past the due date, will be assessed 10% interest per annum until paid. There are several exceptions to this per the Municipal Code.
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Business licenses that are past due, they will be charged a penalty of 10% per month up to a maximum of 40% of the license tax.
Administrative Citations, Fines and Hearing Procedures fees past due will be assessed 15% fine, plus interest accrued at a rate of 1.5% per month until paid.
Transient Occupancy Tax. Any operator who does not remit any tax imposed by this chapter within the time required shall pay a penalty of 10% of the delinquent amount. If not paid within 30 days, an added 10% delinquency will be assessed. A 1.5% interest is applied to all delinquent amounts until paid.
Property Nuisance. Any person who fails to remit payment to the City of any penalty or cost or other charge required to be paid by the City pursuant to a Compliance Order or Nuisance Abatement Order under this chapter on or before the date the penalty, cost or other charge is due, shall in addition to the amount of the penalty, cost or other charge, pay interest on the a mount due at the rate of 10% per annum, pro -rata, from the date on which the amount due first became delinquent until the date that payment is received by the City.
9. Collection Agencies:
A collection agency is a third -party organization engaged by the Cit y for the collection of overdue accounts. Per applicable City policies, a ccounts are transferred to the contracted collection agency. This agency utilizes various collection techniques and tools to locate debtors to facilitate the collection of funds on behalf of the City.
The collection agency shall report back to the City on the status of collection efforts and remit the recovered funds, less their fee, usually a percentage of the amount collected. Should the collection agency be unable to recover the d ebt after exhausting all of the ir collection efforts, they will inform the City that the debt is uncollectable and the City may need to write-off the debt.
Accounts that past due and have a balance of $5.00 or less are excluded from the process as they are deemed as cost inefficient.
10. Allowance for Doubtful Accounts:
To ensure correct financial reporting and prudent fiscal management, the City will establish and maintain an Allowance for Doubtful Accounts. This allowance accounts for potential uncollectible receivables, providing a realistic estimate of
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collectible revenues. The Finance Department will review and adjust this allowance annually based on historical collection data and current economic conditions. This practice aligns with generall y accepted accounting principles (GAAP) and supports transparent and accountable public financial management by acknowledging potential revenue shortfalls due to uncollectible debts.
The calculation for Allowance for Doubtful Accounts is based in part on the aging of customer accounts. Outstanding receivables will be reviewed by funds and department and the following percentages will be applied to determine the allowance amount:
Accounts Receivable Ageing Percentage
30 – 59 Days 25%
60 - 89 Days 50%
90 Days and Older 100%
In addition, customer accounts may be specifically identified as Doubtful Accounts and will be 100% allowed when one of the following occurs:
Recovery is predicted to be minimal, based on management’s knowledge,
The account has been transferred to a Collection Agency, The City has received notice of bankruptcy from a Trustee in Bankruptcy,
Litigation has or is anticipated to commence.
The exception will be for a receivable thought collectible by the department even though greater 120 days delinquent.
11. Designation of an Account as Uncollectible/Bad Debt:
Accounts thought uncollectable will be written off as bad debt after all reasonable collection efforts have been exhausted and wit h the appropriate approvals. Bad debt is recognized as an expense and reflects the part of receivables that cannot be collected. For any Account Receivable that is 120 days or more past its due date, the Finance Department or originating Department Staff will complete the Accounts Re ceivable Write -Off Authorization. The Department Director and the Finance Director must sign the authorization. Approval from the City Manager and/or City Council approval is needed based on specified thresholds.
The authorization should include:
The amount of the debt
The name of the debtor
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The reason for the write-off
Whether the debt should be sent to outside collections
The requests must be accompanied by documentation to substantiate that collections procedures have been followed, and departments have exercised due diligence in their collections’ efforts.
An account may be considered uncollectible after the proper collection procedures have been followed if it meets one or more of the following criteria:
The debt is disputed and the City has insufficient documentation to pursue collection efforts;
The balance has been deemed uncollectable by a Collection Agency;
The invoice requires voiding or adjusting due to an error made by the City;
The cost of further collection efforts will exceed the estimated recovery amount;
The account remains unpaid after the lesser of four years or the applicable period for commencement of a recovery action per California state law;
The debtor cannot be located, nor any of the debtor’s assets; The debtor has no assets and there is no expectation they will have any in the future;
The debtor has died and there is no known estate or guarantor; The debt is discharged through legal action (bankruptcy or court judgment);
The debt has been forgiven by action of the City Council.
12. Write-Off Thresholds:
Uncollectible receivables will be written off in the manner stated below:
Write-off Authority:
Director of Finance may approve of the write -off transactions up to $15,000
City Manager may approve write-off transactions over $ 15,000 up to $50,000
City Council authorization required for transactions over $50,000
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It is the responsibility of the Finance Department to provide the City Manager and/or the City Council with an aging report as needed, identifying all outstanding receivable with a value of $ 15,000 or more per transaction determined to be delinquent or uncollectible, including the basis for collection and the actions taken.
• A write-off of uncollectible accounts receivable from the City’s accounting records does not constitute forgiveness of the debt or gift of public funds.
13. Accounting Entries:
Accounts receivable
Account Debit Credit
Accounts Receivable XXX.XX
Revenue XXX.XX
Payment (Cash Receipt)
Account Debit Credit
Cash XXX.XX
Accounts Receivable XXX.XX
Credit Issued to Customer
Account Debit Credit
Revenue XXX.XX
Accounts Receivable XXX.XX
Allowance for Doubtful Accounts
Account Debit Credit
Bad Debt XXX.XX
Allowance for Doubtful Accounts XXX.XX
Writing off Bad Debt from Allowance of Doubtful Accounts
Account Debit Credit
Allowance for Doubtful Accounts XXX.XX
Accounts Receivable XXX.XX
Payment Received on an account that was written off to the Allowance for Doubtful Accounts
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Account Debit Credit
Accounts Receivable XXX.XX
Allowance for Doubtful Accounts XXX.XX
Account Debit Credit
Cash XXX.XX
Accounts Receivable XXX.XX