There is a lot of jargon in the accounting business. Here are some short definitions of key terms and situations you should keep an eye on in running your business and choosing your accounts payable/accounts receivable tools:
Accounts payable represents money owed by the business to suppliers who provided it with goods or services on credit. Usually the amounts are due within the current accounting period, generally not longer than one year.
Accounts Payable Ledger
The accounts payable ledger is a detailed listing of amounts owed by a business to its suppliers.
Accounts Payable Turnover Ratio
This ratio is calculated as the total amount purchased from suppliers in a period (generally a year), divided by the average total amount of accounts payable outstanding during that period. If the ratio decreases over time, it indicates your business is taking longer to pay your suppliers.
Accounts Receivable (AR)
Accounts receivable represents money owed by customers to whom the business has provided goods or services on credit. Usually the amounts are due within the current accounting period, generally not longer than one year.
Accounts Receivable Ledger
The accounts receivable ledger is a detailed listing of amounts owed by customers.
Aging of Accounts Receivable
Aging is accounts receivable analyzed by due date. Typically the due dates are grouped by monthly periods, such as 30, 60, 90, and 120-plus days past due. If your 120-plus aging is usually under 1 percent of total receivables but has recently jumped to 5 percent, it usually indicates a collections problem.
Bad debts are usually former doubtful accounts receivable that are now considered to offer little or no prospects for collection. The bad debts are written off, removing them from both the allowance for doubtful accounts and the accounts receivable listing. “Bad debts expense” is the charge against income that adjusts the allowance for doubtful accounts to the estimated total amount of uncollected AR.
Bad Debts to Sales (Ratio)
Bad debts to sales is the amount of bad debts (less any recoveries of earlier bad debts) divided by sales. You want to make sure this doesn’t get out of hand.
This is a listing of all items not yet paid, which is usually sent to customers periodically (often monthly). The customer statement shows payments received from the customer and any account credits since the prior customer statement.
A collection letter, sometimes called a dunning letter, is written to the customer as a reminder of overdue accounts receivable. A business will usually have a series of collection letters (each progressively more strongly worded) demanding payment of the overdue account.
Days Sales Outstanding of Accounts Receivable
Days sales outstanding is calculated by dividing the accounts receivable amount by your average daily sales. It’s a measurement of how quickly a business collects its accounts receivables, so a lower number is better.