What is a Collection Item?
In accounting, a collection item is any pending payment that cannot yet be applied to an existing journal entry because it does not represent a tangible cash receivable. Collection items can be created by a variety of circumstances, such as past due debts, bad checks, and government warrants, or third-party payment delays. When a collection item is presented, accounting representatives have two choices: pursue immediate collection or write the collection item off and accept a loss.
In most cases, collection items are created when the invoiced party has not paid the invoice within the time period that the invoice was issued. This is considered a part-due debt. This is referred to as the net terms and can be due upon receipt, net 10 days or longer, depending on the requirements of the company issuing the invoice. Collection items can be resolved by simply sending out a reminder to try to obtain payment in a reasonable amount of time and noting this in the accounting ledger. Once the payment is received, the accounting status will be changed to a payable.
Sometimes a collection item is created when a check payment does not clear for an outstanding item. This can happen when a check is return because there is not enough funding to cover it, or there is a stop payment or hold placed on the check by the payee. In this case, the payment must be kept in collection status until satisfactory payment terms can be arranged by both parties. In addition, any bank fees incurred can be set up as another collection item in the accounting ledger and credited later.
When a warrant is issued to an account by a government treasurer, this item should be listed as a collection item in the accounting books. The warrant guarantees that a certain amount of money will be received at a future date by a government agency. This occurs most often while waiting on grant funding or when a judgment has been placed on another party and funds are being allocated by a court accounting office.
Often, third-party processing firms delay payments and cause a collection item to appear in an accounting process. These third-party payment agencies may hold funds in escrow for a certain period of time until all terms are satisfied in a work-for-hire or project-based agreement. Alternatively, the funds may have to be processed internationally with exchange rates determined by each side of the process. In some cases, a third-party processing firm may be a merchant account or an online payment processing service. This can cause a collection item to be present for a while, but it easily resolved once the payment clears.
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