It is critical for business owners and finance professionals to know and understand Accounts Receivable terms in order to manage their finances.
Whether you’re new to finance and accounting or an experienced professional, sometimes you need a refresher course on finance and accounting terms and their definitions. Our glossary provides definitions for these common industry terms.
Accounts Receivable Glossary
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z
A
Accounts Payable
Accounts Payable is the amount of money that a company owes its vendors. It is shown on balance sheets as a liability. Examples of Accounts Payable include equipment, materials, services, licensing, rent and transportation.
Accounts Receivable
Accounts Receivable is a term used to designate the money a company is owed from customers for delivered goods or services. An account receivable is made and recorded in the general ledger whenever a company allows a customer to instantly possess and acquire goods or services in exchange for a promise to pay (IOU). Examples of Accounts Receivables include a sale to a customer on credit or payment due for an item that has been delivered.
Account Reconciliation
Account Reconciliation is a procedure used to verify the accuracy of data in an account. It entails comparing transaction details with records supplied by external sources such as banks or vendors. These records usually consist of receipts, invoices, financial transaction statements, and financial statements.
Accounts Receivable Aging Report
An Accounts Receivable aging report is a document that provides a company with a summary of all past-due payments from its clients, organized by the length of time an invoice has been outstanding. The aging report helps accounting staff evaluate which Accounts Receivables should go to collections. It also helps management measure how well the company turns revenues into cash and predicts bad debts.
Account Receivable Assets
A company’s assets are typically divided into current and noncurrent assets. Noncurrent assets are long term assets, held for over 1 year. Current assets are liquid assets that are easily converted into cash. Since they’re usually collected in a short time period, Accounts Receivables are considered current assets.
Accounts Receivable Automation
As Accounts Receivables allow a company to track and record payments owed for goods or services rendered, they can be automated by using digital technologies to perform and solve some manual tasks. Automation reduces (and in some cases altogether eliminates) the need for labor-intensive spreadsheet creation and manual data entry.
Accounts Receivable Collections
Accounts Receivable collections is a method a business uses to ensure that clients pay for goods or services received. They usually take the form of a collection notice that explains that the payment is overdue. This can be prevented by implementing proactive measures that would prevent ARs from accruing, including the renegotiation or repayment and payment terms with the borrowers.
Accounts Receivable Dispute Resolution
Accounts Receivables include recorded transactions that the customers have yet to pay in full as they were made on credit. In some circumstances, the customer may dispute a particular charge. The dispute resolution process is the procedure a business goes through to investigate and resolve any disagreements between the business and the customer regarding repayment.
Accounts Receivable Journal Entry
Just like every type of financial activity, Accounts Receivables must be recorded in the company’s accounting records. An Accounts Receivable transaction is recorded in a company’s financial reporting as an Accounts Receivable journal entry.
Accounts Receivable Report
An Accounts Receivable Report is a key tool which provides information on outstanding revenue and key customer accounts. It gives account managers an overview about their financial health and helps them identify potential risks or opportunities.
Accounts Receivables Turnover Ratio
The Accounts Receivable turnover ratio is a metric that shows how well the company transforms unpaid customer debt into completed payments. The turnover ratio compares the total number of credit sales to the average value of Accounts Receivable for a specific accounting period. A high Accounts Receivable turnover ratio indicates that the company is doing well as it shows that many of its clients are paying their bills on time.
Acid Test Ratio (Quick Ratio)
The acid-test ratio (also known as the ‘quick ratio’) is a financial indicator that measures how much money an organization has on hand to cover its short term debts. This can be done by dividing total assets (cash + marketable securities + Accounts Receivable) by current liabilities (obligations due within one year or more out of the current year’s revenue). An ideal acid test ratio is at least 1:1.
B
Bad Debt Ratio
The bad debt ratio refers to the ratio of total debt to total assets. It is defined as loans or credit sales that clients owe that the company decides cannot be collected. To effectively account for bad debt, the company must report it as an expense. Companies should aim for a debt ratio between 0.3 and 0.6 (debt ratios above this level can make it difficult to borrow money).
Balance sheet
A company’s balance sheet provides a summary of a company’s assets and liabilities at a specific point in time. It reports on what the company owns and how much it owes. A balance sheet’s formula is: Assets = Liabilities + Shareholders’ Equity. A balance sheet provides insight on a company’s net worth, ability to cover its obligations and its level of debt.
Bill of Lading (BOL)
A bill of landing is a document issued by a carrier that serves as a confirmation that a cargo was received for shipping.
C
Cash Forecasting
Every company has a cash flow coming in and going out of its accounts, which allows it to fulfill its payroll responsibilities, buy products and supplies, and pay its bills and taxes. Accountants and financial operations managers must predict cash flow to appropriately foresee and plan to fulfill these responsibilities. This is called cash forecasting.
Collection
Collection is the recovery of funds due to a company. This process is usually handled by a collections department or collection agencies.
Collections Maturity Model
A collection maturity model is a prototype that can assist financial decision-makers in analyzing their collections process. It helps take the necessary actions to advance in the collections maturity pyramid — a framework designed for achieving perfect collection operations.
Current assets
Current assets are the assets a company uses within one year. This can include cash, Accounts Receivable, stocks, securities, and other liquid assets.
D
Days Deduction Outstanding (DDO)
A DDO is a metric used to determine the period within which a company collects payment for the sale of goods and services provided. It is calculated by dividing the amount of the open deductions by the average value of deductions incurred within a given period.
Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is a metric used to determine the number of days within which the company collects the payments for the sale of goods and services provided. DSO is typically used to gauge a company’s effectiveness in turning sales into actual revenue or cash. A lower DSO indicates that a business is operating more effectively. If the business has to wait more than one year to convert Accounts Receivable to cash, the specific receivable is considered a long-term asset.
Debits and Credits
Every journal entry is marked as a debit or a credit. Funds going out of an account are referred to as debits, while funds coming in are classified as credits.
Delinquency On Accounts
Delinquency on accounts describes the situation of having unpaid debts. As soon as a borrower misses a payment, a delinquency occurs.
Depreciation Journal Entry
Many companies own assets that depreciate over time, ex.: a production machine with an estimated life span of 20 years. This must be accurately recorded in the company’s accounting ledgers, creating a depreciation journal entry.
E
F
G
Gap Ratio
The gap ratio measures how much profit is recognized by comparing a company’s rate-sensitive assets against its liabilities. If the gap ratio is more than 1, there are more rate-sensitive assets than liabilities. This means that if interest rates rise, revenues or profits will likely increase as well.
H
I
Income Statements
A summary of a company’s income and expenses over a given period is known as an income statement. This is also known as a profit and loss (P&L) statement. It includes the cumulative impact of revenue, expense, gains and losses. They are often shared as quarterly or annual reports.
Inventory Turnover Ratio
The inventory turnover ratio measures how efficient a company is at using its inventory. It is derived by dividing the cost of goods sold by the average inventory value during a specific period. It can be used to measure a company’s efficiency but should only be used to compare similar companies. It is of particular importance in the retail industry. A low inventory turnover ratio could suggest weak sales or excessive inventory. A higher ratio indicates robust sales but could also be a sign of inadequate inventory levels.
Invoice Discrepancy
Invoice discrepancy refers to any errors in invoices, disparities between invoices, or any disputes involving invoices. They are usually resolved by checking the purchase order, sending dispute letters, and requesting corrections.
J
K
L
Long Term Receivables
Long Term Receivables are the debts owed to a company that are due more than twelve months from the last recorded date. In accounting, long term receivables are classified under long-term assets.
M
N
O
P
Past Due Accounts Receivables
Any Accounts Receivable that is past more than 30 or 60 days due but less than 90 days past due as of the closing date are considered past due. It is a report categorizing company’s invoices that have been outstanding from a specific date and time.
Promissory Note
A promissory note is a legal document from one party —usually the lender— to another that lists the amount to be paid on a fixed date or on demand.
Q
R
Return On Investment (ROI)
Return on Investment (ROI) is a metric used to measure an investment’s performance. It is calculated by dividing an investment’s profit by an investment’s cost. It does not take time or risk into account.
S
T
Trial Balance
Trial balances are established to track and define financial activities for a given reporting period. They are closed and their balances are lowered to zero at the end of the reporting period. This is done in order to prevent balances from being confused with the same activity for the following reporting period or with permanent accounts that retain continuous records.
U
V
W
X
Y
Z
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