Accounting Glossary

A credit limit is the maximum amount of credit a business is willing to extend to a customer based on their creditworthiness. Setting a credit limit is essential for managing risk and preventing overexposure to non-payment. In AR managemen...

A credit memo is a document issued to reduce the amount a customer owes, typically due to returned goods, billing errors, or adjustments. It helps businesses maintain accurate customer accounts and ensure that payments are adjusted accordin...

Invoice financing allows businesses to borrow money against the value of their outstanding invoices. This financing solution provides immediate access to working capital, helping businesses improve cash flow without waiting for customers to...

The accounts receivable ledger is a detailed record that tracks amounts owed by customers for goods or services delivered on credit. It is a critical tool for businesses to monitor and manage outstanding invoices and customer payments. An ...

Contra accounts receivable are accounts that offset or reduce the value of receivables, such as allowances for doubtful accounts. These accounts help businesses account for potential losses from uncollectible accounts. Properly managing con...

An aging report is a detailed summary of overdue accounts, typically divided into categories like 30, 60, and 90 days overdue. It serves as a tool for businesses to evaluate the status of their accounts receivable and determine which accoun...

The allowance for doubtful accounts is a provision made in financial statements to account for receivables that are expected to be uncollectible. This allowance ensures businesses don’t overstate their receivables and accurately reflect pot...

Bad debt expense is the cost recognized when an account receivable is deemed uncollectible. It affects a business’s profitability and is recorded on the income statement. By estimating bad debt, businesses can account for potential losses a...

Days Sales Outstanding (DSO) is a metric used to measure how long it takes for a business to collect payment after a sale. A lower DSO indicates quicker collection times and better cash flow management. Businesses rely on DSO to evaluate th...

A credit policy is a set of guidelines that determine how credit is extended to customers, including creditworthiness checks, payment terms, and limits. A strong credit policy helps businesses reduce the risk of bad debt by ensuring that cr...

Factoring is the sale of receivables to a third party at a discount in exchange for immediate cash. This allows businesses to unlock cash flow by turning outstanding invoices into working capital. Factoring is typically used by businesses t...

Trade receivables are amounts owed by customers for goods or services delivered on credit. They are an essential part of a business’s accounts receivable and play a significant role in managing cash flow. Trade receivables are typically col...

Cash application is the process of matching incoming payments to the corresponding invoices in the accounts receivable system. Efficient cash application ensures that businesses can track payments accurately and update customer accounts pro...

Collections is the process of pursuing payment for outstanding invoices from customers. It is crucial for maintaining healthy cash flow and ensuring that businesses are paid for the products or services they provide. The collections process...

Unbilled receivables refer to revenue recognized but not yet invoiced to customers, often due to ongoing services or long-term projects. Managing unbilled receivables ensures that businesses invoice customers promptly, reducing delays in re...

A statement of account is a summary of a customer's account activity, including invoices, payments, and outstanding balances. It is an essential document for keeping customers informed about their financial obligations and helps businesses ...

An invoice is a document issued by a business to request payment for goods or services rendered. It contains critical details such as the total amount due, payment terms, a description of goods or services, and any applicable taxes. In acco...

Posting refers to the process of transferring transaction data into the general ledger for financial reporting. This is a critical step in the accounting process, ensuring that all transactions are properly recorded and categorized. Automa...

A debit memo is a document issued to increase the amount owed by a customer, often due to billing adjustments, additional charges, or errors in the original invoice. It is used to correct discrepancies and ensure that customer accounts refl...

A billing statement is a summary of a customer's account activity, including outstanding invoices, payments made, and any remaining balance. It helps both businesses and customers track payment histories and resolve discrepancies. Regular...

A subsidiary ledger provides a detailed breakdown of accounts within the general ledger, focusing on individual customer accounts. It allows businesses to maintain a granular view of transactions and balances for each customer while keeping...

A write-off is the process of removing an uncollectible account from the books. This typically happens after extensive collection efforts have been exhausted, and it is clear that the debt will not be recovered. Write-offs ensure that busin...

A dunning notice is a formal communication sent to remind customers of overdue payments. It is typically sent in a series, increasing in urgency with each notice as the payment deadline approaches. Dunning notices are essential for encourag...

Net terms refer to the payment terms specified on an invoice, indicating the time period a customer has to pay, such as "Net 30" (payment due within 30 days) or "Net 60" (payment due within 60 days). These terms are critical for businesses ...

Remittance advice is a document sent by a customer to notify a business of payment, often detailing the invoice number and amount paid. It helps businesses match incoming payments to the corresponding invoices in their accounts receivable s...

A lockbox service is a payment collection system where payments are sent to a bank-managed post office box, and funds are deposited directly into the business’s account. This service speeds up payment processing and reduces the manual effor...

A pledge of receivables is a financing arrangement where a business pledges its receivables as collateral for a loan. This allows businesses to access funds quickly by using outstanding invoices as security. Pledging receivables is commonly...

Reconciliation is the process of matching and verifying financial transactions between accounts to ensure accuracy. It is a critical task for businesses to maintain accurate financial records and ensure that all transactions are properly re...

Retention receivables are amounts withheld by customers until certain contract conditions are met, typically seen in construction or large projects. These amounts are often held back to ensure the completion of work to the customer's satisf...

An aging schedule categorizes outstanding invoices based on how long they have been overdue, typically in intervals such as 30, 60, or 90 days. It helps businesses prioritize collections by identifying which accounts require immediate atten...