An account settlement is when a customer makes a payment to bring an outstanding account balance to zero. This can also be a process between two or more parties and end with one party having a positive account balance. In the legal world, an account settlement is when parties settle a dispute over money.
Account Settlement Details
The account settlement process is handled by the Accounts Receivable department within a company. Accounts Receivable works to collect money from customers for goods or services they haven't paid for. Usually, a company breaks down its receivables into ages, such as 1-30 days and 31-60 days. The customer's account will have details on the debt, including the amount the customer owes to the company and how long the account has been unpaid. Once the customer pays off their debt, the account is settled, and the balance should be zero. Sometimes the account settlement can involve more than two parties, such as when two companies exchange goods for another. When this happens, the account balance does not always end up at zero.
Example of Account Settlements
Below are hypothetical examples of account settlement. Each one will illustrate a different type.
A customer buys a skincare product online and sets up an auto-shipment for every month. After several months, the card on the account expires, but the company still ships out the product for that month. Customer Service puts the account on hold, so no additional shipments are made, but the customer still owes for the shipment that they sent. Accounts Receivable contacts the customer and receives new card information. They process the card and receive payment.
Jane and Susan go to court because Jane says Susan owes her money. However, Susan does not agree. Each brings evidence to prove their case. After presenting everything to the judge, the judge rules in Jane's favor. The account is settled as soon as Susan pays the owed amount to Jane.
Types of Account Settlements
There are several different types of account settlements. The first is when a business receives money from customers to bring their outstanding balances to zero. This is the most common type of account settlement.
The second type is when two or more parties agree to exchange goods or services. This type of settlement does not always end with a balance at zero. The third type is when two parties resolve a dispute over money using legal services.
The fourth type is when insurance companies go over offsets with reinsurance companies. Each type of account settlement is fairly common and can happen daily as businesses and departments go over the books and parties in a legal battle come to an agreement.
Significance of Account Settlements
Account settlements are important in several different ways. From a business standpoint, you cannot run a successful business if customers are not paying for the products or services. You need to make a profit to run a successful business. When it comes to legal disputes over money, an account settlement is significant because it means the involved parties have come to an agreement, and they can close the case.