TL;DR
Accounts Receivable (AR) and Accounts Payable (AP) are the lifeblood of business cash flow. This comprehensive glossary covers 40 essential terms—25 AR terms and 15 AP terms—that every finance professional needs to master. Whether you’re implementing automation, onboarding new team members, or optimizing your processes, these definitions provide the foundation for effective financial operations.
Understanding AR and AP terminology is critical for efficient financial operations. Miscommunication around these terms can lead to payment delays, compliance issues, and strained vendor relationships. As automation and AI transform these functions, having a shared vocabulary becomes even more important.
This glossary serves as a reference for finance teams, procurement professionals, and anyone involved in the order-to-cash or procure-to-pay cycles. Each term includes a clear definition and context for how it’s used in modern financial operations.
Accounts Receivable (AR) Terms
1. Accounts Receivable (AR)
Money owed to your company by customers for goods or services delivered on credit. AR represents the outstanding invoices a company has or the money clients owe. It’s listed as a current asset on the balance sheet.
2. Accounts Receivable Aging
A report categorizing outstanding customer invoices by how long they’ve been unpaid (typically 0-30, 31-60, 61-90, 90+ days). Used to identify collection problems and assess credit risk.
3. Bad Debt
Accounts receivable that are deemed uncollectible and must be written off as a loss. Typically occurs when a customer declares bankruptcy or refuses to pay despite collection efforts.
4. Cash Application
The process of matching incoming payments to outstanding invoices. Can be challenging when customers pay multiple invoices with a single check or provide incomplete remittance information.
5. Collections
The process of pursuing payment from customers with overdue accounts. Includes reminder emails, phone calls, payment plans, and potentially legal action.
6. Credit Limit
The maximum amount of credit extended to a customer. Set based on creditworthiness, payment history, and business relationship. Exceeding credit limits requires approval.
7. Credit Memo
A document reducing the amount a customer owes, typically issued for returns, overpayments, discounts, or billing errors. Functions as a negative invoice.
8. Days Sales Outstanding (DSO)
A measure of the average number of days it takes to collect payment after a sale. Lower DSO indicates faster collections and better cash flow. Formula: (Accounts Receivable / Total Credit Sales) × Number of Days.
9. Debit Memo
A document increasing the amount a customer owes, typically for additional charges, interest, or adjustments to previously issued invoices.
10. Dunning
The process of methodically communicating with customers to collect overdue payments. Includes escalating reminder messages from friendly notices to final demands.
11. Invoice
A document requesting payment for goods or services provided. Includes details like items, quantities, prices, payment terms, and due date.
12. Lockbox
A bank-operated service where customer payments are sent directly to a post office box controlled by the bank. The bank processes payments and deposits funds, accelerating cash application.
13. Net Payment Terms
The standard time period allowed for payment without penalties. Common terms: Net 30 (payment due in 30 days), Net 60, Net 90.
14. Order-to-Cash (O2C)
The complete business process from receiving a customer order through fulfillment and payment collection. Includes order management, fulfillment, invoicing, and collections.
15. Past Due
An invoice that has not been paid by its due date. Invoices become past due the day after the due date passes.
16. Payment Terms
Conditions under which a seller will complete a sale, including when payment is due and any discounts for early payment. Examples: Net 30, 2/10 Net 30, Due on Receipt.
17. Remittance Advice
Information sent by a customer explaining what invoices their payment covers. Can be included with payment or sent separately, essential for accurate cash application.
18. Statement of Account
A document sent to customers showing all transactions (invoices, payments, credits) and the current balance owed. Typically sent monthly.
19. Trade Credit
An agreement where a seller allows a buyer to purchase goods or services and pay at a later date. The foundation of B2B accounts receivable.
20. Unapplied Cash
Payments received that haven’t been matched to specific invoices. Often occurs with short payments, overpayments, or when remittance information is unclear.
21. Write-Off
The accounting action of removing an uncollectible receivable from the books. Recognizes that the amount will not be collected and removes it from assets.
22. Revenue Recognition
The accounting principle determining when revenue should be recorded. For AR, revenue is typically recognized when goods are delivered or services performed, not when cash is received.
23. Factoring
Selling accounts receivable to a third party (factor) at a discount to receive immediate cash rather than waiting for customer payment. Used to improve cash flow.
24. Chargebacks
Reversal of a credit card payment initiated by the customer through their bank. Common in disputes, fraud, or when goods/services weren’t as described.
25. Early Payment Discount
An incentive offered to customers who pay before the due date. Typically expressed as “2/10 Net 30” meaning 2% discount if paid within 10 days, otherwise full amount due in 30 days.
Accounts Payable (AP) Terms
1. Accounts Payable (AP)
Money your company owes to suppliers and vendors for goods or services purchased on credit. AP represents short-term liabilities and appears on the balance sheet.
2. Purchase Order (PO)
A formal document sent from buyer to seller specifying the items to be purchased, quantities, prices, and delivery terms. Becomes a binding contract when accepted by the seller.
3. Three-Way Match
The process of verifying that the purchase order, goods receipt, and invoice all agree before approving payment. Ensures you only pay for what was ordered and received at the agreed price.
4. Goods Receipt (GR)
Documentation confirming that ordered items were physically received. Includes quantities received, condition, and receiver signature. Essential for three-way matching.
5. Invoice Processing
The complete workflow of receiving, validating, approving, and paying vendor invoices. Includes data entry, coding, matching, approval routing, and ERP entry.
6. GL Coding
Assigning general ledger account codes to expenses so they’re recorded in the correct financial statement categories. Example: coding office supply invoices to account 5120.
7. Approval Workflow
The routing process that invoices follow to receive necessary approvals before payment. May include department managers, budget owners, and controllers based on amount and type.
8. Payment Terms
Conditions specifying when payment is due to the vendor. Common terms: Net 30, Net 60, Due on Receipt, 2/10 Net 30 (2% discount if paid in 10 days).
9. Duplicate Invoice
An invoice submitted more than once, either accidentally or fraudulently. Detecting duplicates prevents double payment. AI agents catch 99%+ of duplicates.
10. Procure-to-Pay (P2P)
The complete business process from requisitioning goods through payment to the supplier. Includes requisition, PO creation, receipt, invoice processing, and payment.
11. Accruals
Recording expenses that have been incurred but not yet invoiced. Common for recurring services, utilities, or when goods are received but invoices are delayed.
12. Payment Run
A batch process where multiple approved invoices are paid together. Typically done weekly or bi-weekly. Generates checks or ACH payments and records transactions in the ERP.
13. Vendor Master
The central database of all approved vendors, including contact information, payment terms, tax IDs, remittance addresses, and banking details. Must be kept current for accurate payments.
14. T&E (Travel and Expense)
Expense reports submitted by employees for business travel and other company-related expenses. Requires different approval process than standard vendor invoices.
15. Early Payment Discount
A discount offered by vendors for paying invoices before the due date. Example: 2/10 Net 30 means 2% discount if paid within 10 days. AI automation helps capture these discounts consistently.
Why This Terminology Matters
Standardized terminology improves:
Communication - Everyone speaks the same language, reducing errors and misunderstandings.
Training - New team members learn faster with clear definitions.
Automation - AI agents and automation tools require consistent terminology in configuration and rules.
Compliance - Auditors expect proper use of accounting terms in documentation and controls.
Process Improvement - You can’t optimize what you can’t clearly define and measure.
The AI Impact
As AI agents take over AR and AP processing, understanding these terms becomes more important, not less. You need to:
- Configure automation rules using precise terminology
- Review exception reports and understand flagged issues
- Communicate requirements to AI implementation teams
- Train AI agents on your specific definitions and thresholds
The companies seeing the fastest ROI from AI accounting automation are those with clearly documented processes and standardized terminology.
ProcIndex’s AI agents handle AR collections and AP processing automatically, understanding these terms in context to make intelligent decisions.