Accounts receivable
Invoices, terms, collections, aging, cash application and what to do with a bill nobody pays.
9 lessons3 nested pages94 min2 exercisesFree
How should a startup invoice customers and get paid on time? This track answers it on the books of Northwind Traders, Inc., the one company every track in the course is taught on.
The 9 lessons
- Order to cash: from a yes to money in the bankWhat is the order-to-cash process for a startup?
- A correct invoice, and the tax on itWhat should be on an invoice, and how is sales tax shown?
- Payment terms, discounts and late feesWhat do Net 30 and 2/10 net 30 mean, and should I offer an early-payment discount?
- Invoice, revenue and cash: deposits and ASC 606Is a customer deposit revenue, and when do I recognize revenue under ASC 606?
- Collections and the dunning cadenceHow do I collect unpaid invoices without losing the customer?
- Cash application: matching payments to invoicesHow do I match customer payments to invoices, including short pays and Stripe payouts?
- The AR aging reportHow do I read an AR aging report and calculate DSO and CEI?
- Bad debt: the allowance, the write-off and the tax returnHow do I account for a customer who won't pay: allowance or direct write-off?
- Receiving Form 1099-K: what it meansI got a Form 1099-K. What does it report, and why doesn't it match my revenue?
The words this track teaches
Each links to its glossary definition, with the authority behind it.
- Accounts receivableWhat customers owe us for invoices already issued
- InvoiceA claim on a customerConvention
- Control accountA GL account whose balance is the total of a subledger — AR, AP, fixed assets — and is posted only from itConvention
- SubledgerThe detail, by customer, vendor or asset, whose total must equal its control account in the GLConvention
- Revenue recognitionDeciding when, and how much, revenue is recorded — under US GAAP, when (or as) control of a promised good or service transfers to the customer, at the consideration the entity expects to be entitled to
- Sales tax payableSales tax charged to customers and not yet remitted to the state — a liability from the moment it is collected, never revenue, when the entity has elected to exclude such taxes from the transaction price
- Exemption certificateThe document a buyer gives a seller to claim a sales tax exemption — resale, manufacturing, an exempt organization — which the seller keeps to prove why it did not collect. New Mexico's version is the nontaxable transaction certificate (NTTC)Convention
- Credit noteA reduction of what a customer owes
- EvidenceDocumentation supporting a recorded amount
- Payment termsThe agreed timing of payment and any early-payment discount — Net 30, Net 30 EOM, 2/10 net 30, due on receipt; the due date that aging is measured fromConvention
- Early-payment discountA reduction offered for paying before the net due date — 2/10 net 30 is 2% off if paid in 10 days, an annualized return of about 37%Convention
- Contra-revenue accountAn account with a debit balance netted against gross revenue — returns, allowances, sales discounts, rebates — so net revenue is presented after themConvention
- Variable considerationAny part of the price that can change — discounts, rebates, refunds, credits, usage, bonuses, penalties — estimated and included only to the extent a significant reversal is not probable
- Transaction priceThe consideration an entity expects to be entitled to for the contract, including estimated variable consideration and excluding amounts collected for third parties such as sales tax
- Deferred revenueConsideration received, or unconditionally due, before the goods or services are transferred — a liability until the performance obligation is satisfied. ASC 606 calls it a contract liability
- Performance obligationA promise in a contract to transfer a distinct good or service, or a series of substantially the same ones — the unit revenue is recognized by
- ASC 606Topic 606, Revenue from Contracts with Customers — five steps: identify the contract, identify the performance obligations, determine the transaction price, allocate it, recognize revenue as each obligation is satisfied
- Unbilled receivableRevenue recognized where the right to payment is unconditional but the invoice has not yet been issued — a receivable, not a contract asset
- Contract assetRevenue recognized ahead of an unconditional right to payment — the right still depends on something other than the passage of time
- DunningThe sequence of collection communicationsConvention
- Promise to payA customer commitment to a date and amountConvention
- Statement of accountOne customer's open invoices, payments and credits, with the balance due, sent to prompt payment and to surface disputes before they ageConvention
- AgingGrouping open receivables or payables into buckets by days past due date — current, 1–30, 31–60, 61–90, 90+
- ApplicationAssigning received cash to specific invoicesConvention
- Unapplied cashCustomer cash received but not yet assigned to an invoice. It reduces that customer's AR; only a net credit balance is reclassified to a liability at period end
- Remittance adviceThe payer's note of which invoices a payment covers and of any deduction taken — the first thing cash application readsConvention
- Short payA customer payment for less than the invoices it settles, the customer having deducted the difference — a dispute, a credit not yet recorded, or an amount to write off. It needs a reason and a disposition; it never just disappearsConvention
- PayoutA payment processor's transfer to the merchant's bank: charges less refunds, chargebacks, fees and any reserve held. A net figure, booked gross through a clearing accountConvention
- Clearing accountAn account that should net to zero once both sides of a flow have posted — payroll clearing, GR/IR, a payment processor clearing account; a residual balance is the exceptionConvention
- ChargebackA card payment reversed by the cardholder's issuing bank on a cardholder claim — fraud, goods not received, not as described. The processor debits the merchant the amount plus a fee; the merchant may contest it with evidence (representment)Convention
- Processor reserveCard settlements a payment processor withholds against future chargebacks and refunds — a rolling percentage held for a set number of days, a fixed amount, or an upfront hold. It is the merchant's receivable from the processor, not cash on handConvention
- ACHThe Automated Clearing House network — the US batch system for electronic credits and debits under Nacha rules; same-day to two-day settlement, with limited return rights
- DSODSO is a liquidity and working-capital metric, calculated as (Ending AR ÷ Credit sales for the period) × Days in the period.Convention
- CEICEI is a liquidity and working-capital metric, calculated as (Opening AR + Credit sales − Closing total AR) ÷ (Opening AR + Credit sales − Closing current AR).Convention
- Receivables turnoverReceivables turnover is a liquidity and working-capital metric, calculated as Credit sales ÷ Average AR.Convention
- Allowance for credit lossesThe contra-asset holding the expected credit losses on receivables, so AR is presented at the amount expected to be collected
- CECLCurrent expected credit losses — the ASC 326 model that books lifetime expected losses from day one using history, current conditions and reasonable forecasts. ASU 2025-05 adds a practical expedient for current AR and contract assets
- Bad debt expenseThe P&L charge that builds the allowance for credit losses — the provision, not the write-off
- Write-offRemoving an uncollectible receivable against the allowance for credit losses — under the allowance method it has no P&L effect; the expense was taken in the provision
- Direct write-off methodCharging a receivable to bad debt expense only when it is judged uncollectible, with no allowance. Not GAAP where expected credit losses are material; the federal tax rule works the same way (specific charge-off)
- Bad debt recoveryCash collected on a receivable already written off. Under GAAP it is recorded when received: reinstate the receivable against the allowance, then apply the cash. For tax, recovering an amount previously deducted is generally income
- RefundReturning cash already received
- Specific charge-off methodThe federal income tax method for business bad debts: a deduction for a specific debt in the year it becomes wholly or partly worthless, never for an estimated reserve — and, for an accrual-method business, only for an amount already included in income
- Temporary differenceA difference between an asset or liability's tax basis and its book carrying amount that will reverse in future years — the source of deferred taxes
- Deferred tax assetFuture tax savings from deductible temporary differences and carryforwards, measured at enacted rates
- Form 1099-KThe information return from a payment settlement entity reporting a payee's gross payment card and third-party network receipts — card transactions at any amount; third-party network transactions only above $20,000 and 200 transactions, the threshold the OBBBA retroactively reinstated. Gross of refunds, chargebacks and fees, so it never ties to revenue
- Backup withholdingFederal income tax a payer must withhold at 24% from reportable payments — contractor fees, interest, dividends, card settlements — when the payee has not given a correct TIN or the IRS has notified the payer to withhold. Deposited and reported on Form 945
- Form W-9The IRS form a US payee gives a payer to certify its name, tax classification and taxpayer identification number — collected before the first payment, because it drives 1099 reporting and backup withholding