Collection items are outstanding payments that cannot be applied to an existing journal entry, often created by overdue debts, bad checks, government guarantees, or late third-party payments. Accounting representatives can seek immediate pickup or accept a loss. Collection items can be resolved by sending a reminder to get paid, noting it in the ledger, and waiting for payment.
In accounting, a collection item is any outstanding 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 overdue debts, bad checks and government guarantees, or late third-party payments. When a collection item is presented, accounting representatives have two options: seek immediate pickup or cancel the collection item and accept a loss.
In most cases, collection items are created when the invoiced party has not paid the invoice within the time period the invoice was issued. This is considered an overdue debt. This is known as the net terms and may be due upon receipt, net 10 days or more, depending on the requirements of the company issuing the invoice. Collection items can be resolved simply by sending a reminder to try to get paid in a reasonable amount of time and noting it in the ledger. Once the payment is received, the accounting status will change to due.
Sometimes a collectible item is created when a check payment does not clear for an outstanding item. This can happen when a check is returned because there are insufficient funds to cover it, or if the payee places a stop payment or hold on the check. In this case, the payment must be kept in a collection status until both parties can agree on satisfactory payment terms. Additionally, any bank fees incurred can be set up as another collection item in the ledger and credited later.
When a government treasurer issues an arrest warrant on an account, this item must be listed as a collectible item in the ledgers. The order guarantees that a certain amount of money will be received at a future date by a government agency. This most often occurs while awaiting grant funding or when a judgment has been entered on another party and the funds are being appropriated by a court accounting office.
Often third party processing companies delay payments and cause a collection item to show up in an accounting process. These third-party payment agencies may hold funds in escrow for a certain period of time until all the terms in a project-based or contract work agreement are met. 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 company may be a merchant account or online payment processing service. This can cause a collectible to be around for a while, but is easily resolved once the payment is cleared.
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