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ABC - Learning the Receivables Alphabet

Updated: May 24, 2019


Accounts Receivable: Accounts Receivable are the amounts customers owe to a company for the goods / services that it has sold to them. When a company sells to customers on credit basis, it allows them the flexibility to pay the dues after a certain time period from the date of delivery of goods/ services. Such payments, which are due to the company from its (credit sales) customers are known as the company’s accounts receivable. Please write to us at to learn how TimePay can help manage your accounts receivables. Accounts Receivable Financing: Accounts Receivable Financing is a method of working capital financing. Account receivable financing refers to a financing method in which a financier (say a bank / financing company) extends a loan/capital to a company (borrower), on the basis on future receivables (i.e. outstanding invoices) of the company. The financer provides immediate cash to the company, which helps to run the company’s operations. The financier usually earns (interest) income by discounting the value of invoices, while making cash available. Invoice discounting and factoring are two forms of account receivables financing. Accounts Payable: Accounts Payable refer to the amounts a company owes to its creditors, such as vendors/suppliers. Vendors/suppliers can supply goods / services to a company on a credit basis. It means that the suppliers/vendors deliver goods or services and allow the company to pay the dues at a later date. Such payments which the company owes to its suppliers are known as its accounts payable. Aging Schedule: An Aging Schedule is a report that classifies and shows all the receivables of a company according to the length of time for which they have been outstanding. A typical aging report shows accounts receivables in brackets 0-30 days, 30-60 days, 60-90 days and so on.


Bad Debts: In the context of trade, bad debts refer to customers from whom a company is very unlikely to collect or recover payments which are owed to it When a company sells goods or services on credit it allows customers to pay for them after a defined period of time called the credit period. However, it is possible that certain customers have not paid the company long after (say, 6-12 months after) such payments are due. Such customers who have already delayed payments for very long, are also more likely to default on their commitment to pay. Amounts that are long overdue from such potential defaulting customers get classified as bad debts as per relevant accounting norms.


Cash Discount: A company could be selling goods or services either on a credit sales basis (customers pay later) or a cash basis (customers pay immediately). The company may offer a discount in the price of goods / services if the buyer pays on cash basis (i.e. immediately). The purpose of the cash discount is to encourage more buyers to pay immediately and thereby to minimize the need for working capital. Creditor: A creditor is someone to whom a company owes money. E.g. A company makes purchase(s) from another business/individual but has not yet paid the seller for the goods / services. Thereby, the company owes money to such sellers and they are hence referred to as creditors. In balance sheet terms, creditors represent upcoming liabilities of a company. Credit Period: When a company sells goods / services on a credit sales basis, it defines a period within which the payment for these is to be made by customers. This period is known as credit period. The company issues invoices to customers, which act as documents giving details of products/services delivered and amount due for them. The time period starting from the date of issue of the invoice till the date that the payment is due is the credit period.


Days Sales Outstanding (DSO): This refers to the average number of days taken by a business to collect its dues from its customers, after it has delivered products or services to them. A high DSO indicates that a company is unable to collect its dues on time from its customers, while a low DSO indicates that it is able to collect these payments in a timely manner. It can also be expressed as Debtor Days. Formula: Days Sales Outstanding (DSO) = Accounts Receivable = Accounts Receivable X 365 Total Annual Sales*/365 Total Annual Sales* (365 = days in a year) *Some analysts prefer to use Total Credit Sales rather than Total Annual Sales while calculating DSO, thereby excluding any cash sales (immediate payments). Please write to us at to learn how TimePay can reduce your Day Sales Outstanding Debtor: When a company sells goods or services to customers on a credit basis it is implied that the customers will pay their dues after a defined period of time (credit period). Such customers are called debtors -i.e. they have an obligation to pay the company in future. The term ‘debtors’ can also be used in a non-trade context, to refer to individuals/businesses that have borrowed loans from a company and are yet to repay it fully. Doubtful Debts: Doubtful Debts are those debts that have a potential of turning into bad debts in future. When a company has sold products or services to a customer on a credit basis, it records the debts owed to it under the head “Receivables”. However, if later, the company finds that collecting cash from this customer is ‘less than certain’, then such receivables are recorded as doubtful debts. There can be many reasons for a customer’s receivable to turn into a doubtful debt. Trade disputes between a company and its buyer, or deterioration of buyer’s financial strength are two common reasons for receivables turning into doubtful debts. Doubtful debts are different from bad debts in that, there is still ‘some hope of recovery’ at the doubtful debt stage. A rise in doubtful debts is usually followed by a relative decline in cash-flows of the company and could adversely affect its ability to pay its creditors. Default Risk / Credit Risk: In trade context, Default Risk is the probable risk of loss to the company arising from a customer’s inability to pay for the products/services received. It is also known as credit default risk or counter party risk. Good companies will strive to minimize the default risk associated with their customer sets. Accordingly, they would employ various credit management tools to assess the default risks of current and potential customers. Some of the factors that are considered while assessing the default risk of a customer are: Customer’s capacity to pay at a later date- This is assessed through a financial analysis of the Customer’s Income Statement and Balance Sheet Customer’s past-track record in paying its dues on time, to the company (or to others) Character / Reputation of the Customer – market feedback on customer’s track record Whether the Customer is from an industry that has a sector risk Whether the Customer has a business associated with higher degree of country / currency / macro-economic risks Impact analysis in case the Customer defaults i.e. what would be the implications for the company if this customer defaults – severe, moderate etc. Please write to us at to learn how TimePay can help you reduce your credit risks


Factoring: A form of Accounts Receivable Financing in which the company sells its accounts receivable to the financing company (called the “factor”). Essentially, the company (borrower) shares a list of its invoices, which are due from its customers (debtors). The factor “buys” these invoices, and thereby becomes the beneficiary of future payments to be received from debtors. For the borrowing company, the invoices (i.e. current assets) are removed from its books and converted into cash. The factor earns (interest) income by discounting the value at which it buys such invoice portfolio, depending on the credit term of the invoices, and the quality of the receivables (debtors).


Invoice: An official document issued by a seller to a buyer that specifies the amount and cost of products or services that have been provided by the seller. When a company sells goods /services to a customer, it issues them an invoice for these. The invoice specifies the amount that the customer (buyer) must pay to the company (seller) for goods / services, terms of payment, credit period, bank details and other such details. Invoice Discounting: A form of Accounts Receivable Financing in which a company raises an invoice to a financing company on a certain accounts receivable. The factor pays the company a certain percent of the cash owed to it immediately. When the debtor pays the company back, the factor returns the remaining invoice amount to the company minus a service fee. Invoice discounting is a form of Accounts Receivable Financing. In Invoice Discounting, the financier (say a bank / financing company) extends a loan/capital to a company (borrower), on the basis on future receivables (i.e. outstanding invoices) of the company. The financier provides immediate cash to the company, which helps to run the company’s operations. The financier usually earns (interest) income by discounting the value of invoices, while making cash available. The difference between invoice discounting and factoring is that – in the former, the receivables (i.e. debtors) of the company remain on the books of the company. Effectively, when the company receives its dues from customers against the discounted invoices, such amounts are paid back to the financing company.


Net Receivables: Net receivables is the total money owed to a company by its customers minus the company’s provision for doubtful debts. Net Receivables=Gross Trade Receivables-Provision for Doubtful Debts


Pro Forma Invoice: It is an invoice sent by the seller to the buyer before goods / services provided by the buyer reach the seller. It is a commitment to provide certain products/services at a certain price before these have actually been provided. Essentially, it is a preliminary invoice which is invariably replaced by a final invoice after goods / services have been delivered. It gives the buyer and seller a very good idea about the impending transaction. The contents of a pro forma invoice are very similar or identical to those of a final invoice. Provision for Doubtful Debts: When a company makes credit sales, pending dues from such sales are reflected in “debtors” section of balance sheet. Over a period of time, some of the debtors could get classified as doubtful debts or bad debts – because such customers may not have paid, long after due date. In such scenario, from an accounting perspective, the company is expected to “set aside” (or “provide”) relevant amounts from the debtors’ section. In effect, the company reduces its expectation in terms of due amounts to be received in future. Purchase Order (PO): A Purchase Order (PO) is an official document issued by a buyer, specifying products/services that it wants the seller to deliver. A Purchase Order typically includes the pricing, quantity and other details. For the seller, Purchase Orders are important since they represent an official request by the customer (buyer) to procure its goods / services. It is a common practice among large corporations to insist that any seller looking to provide goods / services to them, must act only on the basis of valid Purchase Orders. Sellers are also usually required to mention the Purchase Order number in all relevant correspondence – i.e. in invoices, payment requests etc.


Trade Discount: A Trade Discount is a discount on the price of a product which is offered to a trade intermediary, but not to an end consumer. Generally, a company seeking to tap into a wider customer audience, may choose to employ a network of resellers / distributors / wholesalers / dealers (called “trade intermediaries”) to market its products. The company offers various trade discounts to various such trade intermediaries, to incentivize them to sell the company’s product down the chain, with the ultimate objective of reaching large number of end-customers. Learn more about receivables management at

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