Which Of The Following Is Money Owed To A Business By Credit Customers?

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Finance

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Abnormal Rate of return

Definition: Abnormal rate of return or 'alpha' is the return generated by a given stock or portfolio over a period of time which is higher than the return generated by its benchmark or the expected rate of return. It is a measure of performance on a risk-adjusted basis. Description: The abnormal rate of return on a security or a portfolio is different from the expected rate of return. It is the return generated by a security or a portfolio which is in excess of its benchmark or the return predicted by an equilibrium model such as capital asset pricing model (CAPM). Abnormal rate of return can either be positive or negative depending on how the security or a fund has performed in comparison to its benchmark. The normal rate of return can be a forecasted return based on model or it can be the return on an index, such as S&P BSE Sensex or 50-share Nifty index. The abnormal return on an investment is calculated as follows (1): RAbnormal = RActual – RNormal An investment's abnormal return could be positive or negative. It essentially measures how the stock or a fund has performed over a given period of time. Abnormal rate of return as a measure of performance is useful to investors as a valuation tool and for comparing returns to market performance (2). Example: Suppose a stock ABCD experiences a 30% return in a given year. Analysts expected ABCD to experience a return of 20% for that year. The (positive) abnormal rate of return ABCD is: 30% actual return – 30% projected return = 10% positive abnormal return ABCD experience a positive abnormal return of 10% during that year.

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NEXT DEFINITION

Accounts Receivable

Definition: Accounts Receivable (AR) is the proceeds or payment which the company will receive from its customers who have purchased its goods & services on credit. Usually the credit period is short ranging from few days to months or in some cases maybe a year. Description: The word receivable refers to the payment not being realised. This means that the company must have extended a credit line to its customers. Usually, the company sells its goods and services both in cash as well as on credit. When a company extends credit to the customer, the sale is realised when the invoice is generated, but the company extends a time period to the customers to pay the amount after some time. The time period could vary from 30-days to a few months. Account Receivables (AR) are treated as current assets on the balance sheet. Let's understand AR with the help of an example. Suppose you are a manufacturer M/S XYZ Pvt Ltd and you manufacture tyres. A customer gives you an order of Rs 1,00,000 for 100 tyres. Now, when the invoice is generated for that amount, sale is recorded, but to make the payment the company extends the credit period of 30-days to the customer. Till that time the amount of Rs 1,00,000 becomes your account receivable because the customer will pay that amount before the period expires. If not, the company can charge a late fee or hand over the account to a collections department. Once the payment is made, the cash segment in the balance sheet will increase by Rs 1,00,000, and the account receivable will be decreased by the same amount, because the customer has made the payment. The amount of account receivable depends on the line of credit which the customer enjoys from the company. Usually, this is offered to customers who are frequent buyers.

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Definition of 'Accounts Payable'

Definition: When a company purchases goods on credit which needs to be paid back in a short period of time, it is known as Accounts Payable. It is treated as a liability and comes under the head 'current liabilities'. Accounts Payable is a short-term debt payment which needs to be paid to avoid default.

Description: Accounts Payable is a liability due to a particular creditor when it order goods or services without paying in cash up front, which means that you bought goods on credit. Accounts Payable as a term is not limited to companies. Even individuals like you and me have Accounts Payable.

We consume electricity, telephone, broadband and cable TV network. The bills get generated towards the end of the month or a particular billing period. It means that the service provider gave you some service and sends the bill which needs to be paid by a certain date or else you will default. This becomes Accounts Payable.

Let's also understand from a company's point of view. You are a company A who purchases goods from company B on credit. The amount raised needs to be paid back in 30 days.

Company B will record the same sale as accounts receivable and company A will record the purchase as accounts payable. This is because company A has to pay company B.

Under the accounting (Accrual) methodology, this will be treated as a sale even though money has not exchanged hands yet. The accounts department needs to be extremely careful while processing transactions relating to Accounts Payable.

Here, time is the essence considering it is a short term debt which needs to be paid within a specific period of time. Along with that accuracy is the key, which involves the amount that needs to be paid along with the name of the supplier. Accuracy is important because it will impact the company's cash position.

PREV DEFINITION

Abnormal Rate of return

Definition: Abnormal rate of return or 'alpha' is the return generated by a given stock or portfolio over a period of time which is higher than the return generated by its benchmark or the expected rate of return. It is a measure of performance on a risk-adjusted basis. Description: The abnormal rate of return on a security or a portfolio is different from the expected rate of return. It is the return generated by a security or a portfolio which is in excess of its benchmark or the return predicted by an equilibrium model such as capital asset pricing model (CAPM). Abnormal rate of return can either be positive or negative depending on how the security or a fund has performed in comparison to its benchmark. The normal rate of return can be a forecasted return based on model or it can be the return on an index, such as S&P BSE Sensex or 50-share Nifty index. The abnormal return on an investment is calculated as follows (1): RAbnormal = RActual – RNormal An investment's abnormal return could be positive or negative. It essentially measures how the stock or a fund has performed over a given period of time. Abnormal rate of return as a measure of performance is useful to investors as a valuation tool and for comparing returns to market performance (2). Example: Suppose a stock ABCD experiences a 30% return in a given year. Analysts expected ABCD to experience a return of 20% for that year. The (positive) abnormal rate of return ABCD is: 30% actual return – 30% projected return = 10% positive abnormal return ABCD experience a positive abnormal return of 10% during that year.

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NEXT DEFINITION

Accounts Receivable

Definition: Accounts Receivable (AR) is the proceeds or payment which the company will receive from its customers who have purchased its goods & services on credit. Usually the credit period is short ranging from few days to months or in some cases maybe a year. Description: The word receivable refers to the payment not being realised. This means that the company must have extended a credit line to its customers. Usually, the company sells its goods and services both in cash as well as on credit. When a company extends credit to the customer, the sale is realised when the invoice is generated, but the company extends a time period to the customers to pay the amount after some time. The time period could vary from 30-days to a few months. Account Receivables (AR) are treated as current assets on the balance sheet. Let's understand AR with the help of an example. Suppose you are a manufacturer M/S XYZ Pvt Ltd and you manufacture tyres. A customer gives you an order of Rs 1,00,000 for 100 tyres. Now, when the invoice is generated for that amount, sale is recorded, but to make the payment the company extends the credit period of 30-days to the customer. Till that time the amount of Rs 1,00,000 becomes your account receivable because the customer will pay that amount before the period expires. If not, the company can charge a late fee or hand over the account to a collections department. Once the payment is made, the cash segment in the balance sheet will increase by Rs 1,00,000, and the account receivable will be decreased by the same amount, because the customer has made the payment. The amount of account receivable depends on the line of credit which the customer enjoys from the company. Usually, this is offered to customers who are frequent buyers.

Read More