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I’ve spent quite a bit of time trying to understand how transactions affect accounts. One should remember that the effects of Debit (dr) & Credit (cr) depend on the accounting you are dealing with. For example, receiving money into a bank account, i.e. debiting it, will increase its balance. Whereas, sale of goods, or crediting the sales account, increases its balance. Hope this illustration helps!

Effects on accounts

Sales Orders (SO) & Purchase Orders (PO) are 2 key trade documents in any business. They usually two important fields: Payment terms & Delivery terms. After a brief on these terms, we go on to explain Incoterms: internationally accepted trade-terms used in international contracts.

Payment terms most often represent the payment instrument (cheques/collaterals), credit period and discounts, if applicable. In the simplest form, P30 indicates that payment will be made 30 days after receiving the bill/invoice. P30/2%20 is a more complex term indicating that if the payment is done within 20 days (instead of the 30-day credit period), the buyer is entitled tot a 2% discount on invoice value. Payment terms could also be based on collaterals like L/C (Letter of Credit) or Irrevocable credits that help minimize the seller’s risk.

Delivery terms are indicative of the agreement on delivery cost, responsibility (=risk) and ownership of transported goods/services. Costs include freight charges, taxes & duties and commissions to clearing agents. As a seller, I may choose to transfer ownership at my premises {ExWorks}, at my port {Free Carrier}, after loading cargo on board air/sea/road/rail vessel {Free On Board}, customer’s port {Delivered Ex Quay/Ship} or right up to ship-to address (address where goods are required to be delivered).

Incoterms are delivery terms standardized by the International Chamber of Commerce (ICC) for use in international trade. The abbreviations along with description & associated buyer/seller liability are mentioned here.

Talking about commission, in reality commission is a sweeter word for greasing charges at ports; needed an example of organized crime, take this! How would it look if I had a ledger account called Bribes? Doesn’t Agent Commission really sound decent? One of my uncles lives of this profession, so I won’t say another word (continue reading…)

Days Sales Outstanding (DSO) is an important financial metric for evaluating the effectiveness of converting credit sales (money owed to you) to cash. Considering the time value of money, it indicates the age of an organization’s accounts receivables or AR (sum of all money owed by debtors) in days and the average time it takes to turn receivables into cash. Ideally, this should never exceed the standard payment terms. So for a 52 credit period offered by credit card to borrowers (which is us, debtors to the issuing company), best DSO for the company will be 52. A higher DSO would indicate inefficiency in their collection cycle (and in our payment which they will gladly oblige by slamming exorbitant interest or by delegating collection to recovering agents).

DSO (measured in days) is calculated for a period,

DSO = Accounts Receivables / Credit Sales for the period * 30 (days)

DSO can vary significantly over the course of a year on account of several reasons:
- Fluctuation in sales volume, due to seasonality, economy, etc
- Negotiated payment terms, promotional discounts
Since these situations are common in business, DSO is argued (continue reading…)

Evaluated Receipt Settlement (ERS) is an EDI (Electronic Data Interchange) procedure, part of Supply Chain Management.  It was pioneered by GM to address the issues associated with payments against invoices (bills) for goods received. ERS is valid in India. (continue reading…)