What is a claim
In accounting terms, a claim is what a customer owes your company for a product or service they have purchased.
In the realm of accounting, a claim refers to an outstanding amount that a customer owes to your business for goods or services rendered. It typically manifests as an invoice that has been issued but remains unpaid.
Such a claim is considered resolved once payment has been received and the funds are deposited into the business’s account. These are often termed as ‘customer claims’.
What is a creditor and a debtor?
Claims inherently involve two key parties: the creditor and the debtor. A debtor is the party that owes money, usually as a result of purchasing on credit (through invoicing, credit card transactions) or acquiring a loan. Conversely, the creditor is to whom the money is owed.
When your business procures goods or services and obtains an invoice, your company stands as the debtor, while the supplier is the creditor.
Dealing with loss on claim
Occasionally, customers may default on payments, either partially or in full, which is known as a loss on claim. Insolvency or bankruptcy of the customer is a frequent cause for such losses.
In the event a customer fails to fulfill payment obligations, the outstanding claim may be classified as a loss. Australian accounting standards necessitate that certain conditions be met before recording an invoice as a bad debt loss:
- The invoice has been referred to a debt collection agency, yet remains unsettled.
- Six months have lapsed since the payment due date, and despite the dispatch of minimum three payment reminders, the debt persists.
- The debtor company has been decreed bankrupt or is under liquidation.
- A bankruptcy estate has been constituted for the customer, but it possesses insufficient funds to cover the claim.