The process of matching incoming payments to outstanding invoices and directing those payments to the appropriate account where they can be entered is referred to as a cash application.Companies must have a method for monitoring their cash flow and capital so that funds can be utilized in a manner that is accurate, rapid, and effective. Know more about accounts receivable cash application.
What exactly is the purpose of the Cash Application?
Incoming payments are applied to the appropriate customer accounts and receivable bills as part of the accounts receivable (AR) process. Cash application is one of the sub-processes that fall under AR.
The corporation will be unable to make use of any incoming funds until it has been appropriately allocated. The sooner a company can put its cash reserves to use, the sooner it will be able to pay its employees and its bills, fulfil purchase orders, invest in new prospects, and distribute dividends to its shareholders. Customers now have a wide variety of payment options available to them, which has increased the visibility of cash applications in today’s society. This introduces whole new difficulties for the organizations involved.
During your consideration of cash applications, you might come across the following terms.
- Receivables from Customers
The term “Accounts Receivable,” abbreviated as “AR,” describes the sum of money that is owed to the company.This pertains to products and services that have been rendered to the client, but for which payment has not yet been received.
- The Specialist in Cash Applications
The cash application specialist is in charge of managing the cash application process and is accountable for correctly assigning incoming cash to the invoice that corresponds to it.
- Days Sales Outstanding
The term “Days Sales Outstanding” (DSO) refers to the typical number of days that pass before a company can receive payment for the goods and services it has given to customers.Cash application is important to DSO since it contributes to reducing the typical number of days needed to complete a task.When the DSO is lower, it indicates that the company is running more efficiently.
An invoice is included with each purchase of a product or service from this company. The customer is informed on the invoice of the amount that is owed as well as the product or service that was rendered that necessitates payment.
The term “remittance” refers to the cash that a client sends to an organization in exchange for the good or service that they have received. The business 0can more accurately assign payments to the invoices that are associated with them and to the appropriate account (or accounts) in the general ledger when they use the cash application.