What Is Assurance?

Assurance refers to financial coverage that provides remuneration for an event that is certain to happen. Assurance is similar to insurance, with the terms often used interchangeably. However, insurance refers to coverage over a limited time, whereas assurance applies to persistent coverage for extended periods or until death. Assurance may also apply to validation services provided by accountants and other professionals.

How Assurance Works

One of the best examples of assurance is whole life insurance as opposed to term life insurance. In the U.K., “life assurance” is another name for life insurance. The adverse event that both whole life and term life insurance deal with is the death of the person the policy covers. Since the death of the covered person is certain, a life assurance policy (whole life insurance) results in payment to the beneficiary when the policyholder dies. 

A term life insurance policy, however, covers a fixed period—such as 10, 20, or 30 years—from the policy’s purchase date. If the policyholder dies during that time, the beneficiary receives money, but if the policyholder dies after the term, no benefit is received. The assurance policy covers an event that will happen no matter what, while the insurance policy covers a covered incident that might occur (the policyholder might die within the next 30 years).

Types of Assurance

Assurance can also refer to professional services provided by accountants, lawyers, and other professionals. These professionals assure the integrity and usability of documents and information produced by businesses and other organizations. Assurance in this context helps companies and other institutions manage risk and evaluate potential pitfalls. Audits are one example of assurance provided by such firms for businesses to assure that information provided to shareholders is accurate and impartial.

Assurance services are a type of independent professional service usually provided by certified or chartered accountants, such as certified public accountants (CPAs). Assurance services can include a review of any financial document or transaction, such as a loan, contract, or financial website. This review certifies the correctness and validity of the item being reviewed by the CPA.

Example of Assurance

As an example of assurance services, say investors of a publicly-traded company grow suspicious that the company is recognizing revenue too early. Early realization of revenue might lead to positive financial results in upcoming quarters, but it can also lead to worse results in the future.

Under pressure from shareholders, company management agrees to hire an assurance firm to review its accounting procedures and systems to provide a report to shareholders. The summary will assure shareholders and investors that the company’s financial statements are accurate and revenue recognition policies are in line with generally accepted accounting principles (GAAP).

The assurance firm reviews the financial statements, interviews accounting department personnel, and speaks with customers and clients. The assurance firm makes sure that the company in question has followed GAAP and assures stakeholders that the company’s results are sound.

Assurance vs. Negative Assurance

Assurance refers to the high degree of certainty that something is accurate, complete, and usable. Professionals affirm these positive assurances after careful review of the documents and information subject to the audit or review.

Negative assurance refers to the level of certainty that something is accurate because no proof to the contrary is present. In other words, since there is no proof that the information is inaccurate or that deceptive practices (e.g., fraud) occurred, it is presumed to be accurate.

Negative assurance usually follows assurance of the same set of facts and is done to ensure that the first review was appropriate and without falsifications or gross errors. Therefore, the amount of scrutiny is not as intense as the first review because the negative assurance auditor purposefully looks for misstatements, violations, and deception.

Assurance FAQs

What Does Life Assurance Mean?

Assurance has dual meanings in business. It refers to the coverage that pays a benefit for a covered event that will eventually happen. Assurance also refers to the assurance given by auditing professionals regarding the validity and accuracy of reviewed documents and information. These auditors exercise great care to make these positive assurances.

What Is an Example of Assurance?

Whole life insurance is perhaps one of the best-understood examples of assurance. As long as the policy remains in force, this type of insurance guarantees to pay a death benefit at the death of the insured, despite how long that event takes to occur.

What Is Meant by Assurance in Auditing?

Assurance in auditing refers to the opinions issued by a professional regarding the accuracy and completeness of what’s analyzed. For example, an accountant assuring that financial statements are accurate and valid asserts that they have reviewed the documents using acceptable accounting standards and principles.

What Is the Difference Between Life Insurance and Assurance?

Life insurance and life assurance are often used interchangeably and sometimes refer to the same type of contract. However, life insurance is coverage that pays a benefit for the death of the insured if the death occurs during the limited, contractual term. Assurance or life assurance is coverage that pays a benefit upon the death of the insured despite how long it takes for that death to occur.

What Kind of Company Is an Assurance Company?

An assurance company could be a life insurance/assurance company providing benefits upon the certain death of the insured, but commonly refers to an accounting or auditing firm providing assurance services to businesses and organizations. These services include complete and intense reviews of documents, transactions, or information. The purpose of these reviews is to confirm and assure the accuracy of what was reviewed.

The Bottom Line

Assurance is coverage that pays a benefit upon the eventual occurrence of a certain event. It also refers to a service rendered by a professional to confirm the validity and accuracy of reviewed documents and information. Assurances in auditing can help companies address risks and potential problems affecting the accuracy of their reporting. On the contrary, negative assurance is a less intense review that also provides a form of assurance. Negative assurance asserts that what was reviewed is accurate because nothing contradicting this claim exists.

What Is the Automated Clearing House (ACH)?

The Automated Clearing House (ACH) is an electronic funds-transfer system run by Nacha. The Automated Clearing House traces its roots back to the late 1960s but was officially established in the mid-1970s. The payment system provides many types of ACH transactions, such as payroll deposits. It requires a debit or credit from the originator and a credit or debit on the recipient’s end.

How the Automated Clearing House (ACH) Works

The ACH Network is an electronic system that serves financial institutions to facilitate financial transactions in the U.S. It represents more than 10,000 financial institutions and ACH transactions totaled more than $72.6 trillion in 2021 by enabling over 29 billion electronic financial transactions.

The network essentially acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of deposits and payments, including:

Here’s how the system works. An originator starts a direct deposit or direct payment transaction using the ACH network via debit and credit. The originator’s bank, also known as the originating depository financial institution, takes the ACH transaction and batches it together with other ACH transactions to be sent out at regular times throughout the day.

An ACH operator, either the Federal Reserve or a clearinghouse, receives the batch of ACH transactions from the originating institution with the originator’s transaction. The ACH operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient, also known as the receiving depository financial institution. The recipient’s bank account receives the transaction, thus reconciling both accounts and ending the process.

Special Considerations

The ACH payment system is offered by Nacha. Formerly known as the National Automated Clearing House Association, it’s a self-regulating institution. The ACH network’s history dates back to 1968 but wasn’t officially established until 1974.

This network manages, develops, and administers the rules surrounding electronic payments. The organization’s operating rules are designed to facilitate growth in the size and scope of electronic payments within the network.

Advantages and Disadvantages of the ACH

Advantages

Because the ACH Network batches financial transactions together and processes them at specific intervals throughout the day, it makes online transactions extremely fast and easy. NACHA rules state that the average ACH debit transaction settles within one business day, and the average ACH credit transaction settles within one to two business days.

The use of the ACH network to facilitate electronic transfers of money has also increased the efficiency and timeliness of government and business transactions. More recently, ACH transfers have made it easier and cheaper for individuals to send money to each other directly from their bank accounts by direct deposit transfer or e-check.

ACH for individual banking services typically took two or three business days for monies to clear, but starting in 2016, NACHA rolled out in three phases for same-day ACH settlement. Phase 3, which launched in March 2018, requires RDFIs to make same-day ACH credit and debit transactions available to the receiver for withdrawal no later than 5 p.m. in the RDFI’s local time on the settlement date of the transaction, subject to the right of return under NACHA rules.

Disadvantages

Certain financial institutions may restrict the amount of money you can transfer. If you want to do a large transfer, you may have to do this in multiple steps. For instance, if you’re transferring money to your child who’s away in college, you may be limited to transfers of $1,000. If they need more for books and rent, you will be required to send more than one transfer.

Some banks charge fees for ACH transactions. And this can be a per-transaction fee. If you’re used to doing multiple transactions, this can add up and put a big dent in your bottom line.

The ACH network only works between U.S. accounts. This means that you can’t conduct any transactions that are meant for international transfers using this payment system. So if you want to send money to someone abroad, you must do so using a wire transfer or other similar payment processing network. As such, the transaction will not necessarily be executed on the same day.

The Bottom Line

Sending money to someone else used to be a big hassle. But the advent of electronic technology is making things much easier. The Automated Clearing House or ACH facilitates transfers between banks. This eliminates the need for withdrawing money from one account and depositing it into another. The network is updated to allow businesses and individuals to execute transactions on the same day. But keep in mind that there are restrictions—notably, that you can’t send money internationally. You may also be limited in how much you can transfer and you may end up incurring fees. Check with your bank about how it handles ACH transactions.

What Are Accruals?

Accruals are revenues earned or expenses incurred that impact a company’s net income on the income statement, although cash related to the transaction has not yet changed hands. Accruals also affect the balance sheet, as they involve non-cash assets and liabilities.

For example, if a company has performed a service for a customer, but has not yet received payment, the revenue from that service would be recorded as an accrual in the company’s financial statements. This ensures that the company’s financial statements accurately reflect its true financial position, even if it has not yet received payment for all of the services it has provided.

Accrual accounts include, among many others, accounts payable, accounts receivable, accrued tax liabilities, and accrued interest earned or payable.

Understanding Accruals

An accrual is a record of revenue or expenses that have been earned or incurred, but have not yet been recorded in the company’s financial statements. This can include things like unpaid invoices for services provided, or expenses that have been incurred but not yet paid. Accruals are important because they help to ensure that a company’s financial statements accurately reflect its true financial position, even if it has not yet received payment for all of the services it has provided or paid all of its bills.

In accrual-based accounting, revenue is recognized when it is earned, regardless of when the payment is received. This means that if a company provides a service to a customer in December, but does not receive payment until January of the following year, the revenue from that service would be recorded in December, when it was earned. Similarly, expenses are recorded when they are incurred, regardless of when they are paid. For example, if a company incurs expenses in December for a service that will be received in January, the expenses would be recorded in December, when they were incurred.

The Accrual Method of Accounting

Accruals and deferrals are the basis of the accrual method of accounting, the preferred method by generally accepted accounting principles (GAAP). Using the accrual method, an accountant makes adjustments for revenue that has been earned but is not yet recorded in the general ledger and expenses that have been incurred but are also not yet recorded. The accruals are made via adjusting journal entries at the end of each accounting period, so the reported financial statements can be inclusive of these amounts.

The use of accrual accounts greatly improves the quality of information on financial statements. Before the use of accruals, accountants only recorded cash transactions. Unfortunately, cash transactions don’t give information about other important business activities, such as revenue based on credit extended to customers or a company’s future liabilities. By recording accruals, a company can measure what it owes in the short-term and also what cash revenue it expects to receive. It also allows a company to record assets that do not have a cash value, such as goodwill.

In double-entry bookkeeping, the offset to an accrued expense is an accrued liability account, which appears on the balance sheet. The offset to accrued revenue is an accrued asset account, which also appears on the balance sheet. Therefore, an adjusting journal entry for an accrual will impact both the balance sheet and the income statement.

Recording Accruals on the Income Statement and Balance Sheet

To record accruals on the balance sheet, the company will need to make journal entries to reflect the revenues and expenses that have been earned or incurred, but not yet recorded. For example, if the company has provided a service to a customer but has not yet received payment, it would make a journal entry to record the revenue from that service as an accrual. This would involve debiting the “accounts receivable” account and crediting the “revenue” account on the income statement.

On the other hand, if the company has incurred expenses but has not yet paid them, it would make a journal entry to record the expenses as an accrual. This would involve debiting the “expenses” account on the income statement and crediting the “accounts payable” account.

Examples of Accruals

Let’s look at an example of a revenue accrual for a utility company.

Accounts Payable

An example of an accrued expense for accounts payable f could be the cost of electricity that the utility company has used to power its operations, but has not yet paid for. In this case, the utility company would make a journal entry to record the cost of the electricity as an accrued expense. This would involve debiting the “expense” account and crediting the “accounts payable” account. The effect of this journal entry would be to increase the utility company’s expenses on the income statement, and to increase its accounts payable on the balance sheet.

Another example of an expense accrual involves employee bonuses that were earned in 2019, but will not be paid until 2020. The 2019 financial statements need to reflect the bonus expense earned by employees in 2019 as well as the bonus liability the company plans to pay out. Therefore, prior to issuing the 2019 financial statements, an adjusting journal entry records this accrual with a debit to an expense account and a credit to a liability account. Once the payment has been made in the new year, the liability account will be decreased through a debit, and the cash account will be reduced through a credit.

Accounts Receivable

The utility company generated electricity that customers received in December. However, the utility company does not bill the electric customers until the following month when the meters have been read. To have the proper revenue figure for the year on the utility’s financial statements, the company needs to complete an adjusting journal entry to report the revenue that was earned in December.

It will additionally be reflected in the receivables account as of December 31, because the utility company has fulfilled its obligations to its customers in earning the revenue at that point. The adjusting journal entry for December would include a debit to accounts receivable and a credit to a revenue account. The following month, when the cash is received, the company would record a credit to decrease accounts receivable and a debit to increase cash.

Accrued Interest

Another expense accrual occurs for interest. For example, a company with a bond will accrue interest expense on its monthly financial statements, although interest on bonds is typically paid semi-annually. The interest expense recorded in an adjusting journal entry will be the amount that has accrued as of the financial statement date. A corresponding interest liability will be recorded on the balance sheet.

The Bottom Line

Accruals impact a company’s bottom line, although cash has not yet exchanged hands. The accrual method of accounting is the preferred method according to GAAP, and involves making adjustments for revenue that has been earned but is not yet recorded, and expenses that have been incurred but are not yet recorded, by making adjusting journal entries at the end of the accounting period. Accruals are important because they help to ensure that a company’s financial statements accurately reflect its actual financial position.

What Is Accounts Receivable Financing?

Accounts receivable (AR) financing is a type of financing arrangement in which a company receives financing capital related to a portion of its accounts receivable. Accounts receivable financing agreements can be structured in multiple ways usually with the basis as either an asset sale or a loan.

Understanding Accounts Receivable Financing

Accounts receivable financing is an agreement that involves capital principal in relation to a company’s accounts receivables. Accounts receivable are assets equal to the outstanding balances of invoices billed to customers but not yet paid. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payment required within one year.

Accounts receivable are one type of liquid asset considered when identifying and calculating a company’s quick ratio which analyzes its most liquid assets:

Quick Ratio = (Cash Equivalents + Marketable Securities + Accounts Receivable Due within One Year) / Current Liabilities

As such, both internally and externally, accounts receivable are considered highly liquid assets which translate to theoretical value for lenders and financiers. Many companies may see accounts receivable as a burden since the assets are expected to be paid but require collections and can’t be converted to cash immediately. As such, the business of accounts receivable financing is rapidly evolving because of these liquidity and business issues. Moreover, external financiers have stepped in to meet this need.

The process of accounts receivable financing is often known as factoring and the companies that focus on it may be called factoring companies. The best factoring companies will usually focus substantially on the business of accounts receivable financing but factoring in general may be a product of any financier. Financiers may be willing to structure accounts receivable financing agreements in different ways with a variety of different potential provisions.​

Structuring

Accounts receivable financing is becoming more common with the development and integrations of new technologies that help to link business accounts receivable records to accounts receivable financing platforms. In general, accounts receivable financing may be slightly easier for a business to obtain than other types of capital financing. This can be especially true for small businesses that easily meet accounts receivable financing criteria or for large businesses that can easily integrate technology solutions.

Overall, there are a few broad types of accounts receivable financing structures.

Asset Sales

Accounts receivable financing is typically structured as an asset sale. In this type of agreement, a company sells accounts receivable to a financier. This method can be similar to selling off portions of loans often done by banks.

A business receives capital as a cash asset replacing the value of the accounts receivable on the balance sheet. A business may also need to take a write-off for any unfinanced balances which would vary depending on the principal to value ratio agreed on in the deal.

Depending on the terms, a financier may pay up to 90% of the value of outstanding invoices. This type of financing may also be done by linking accounts receivable records with an accounts receivable financier. Most factoring company platforms are compatible with popular small business bookkeeping systems such as Quickbooks. Linking through technology helps to create convenience for a business, allowing them to potentially sell individual invoices as they are booked, receiving immediate capital from a factoring platform.

With asset sales, the financier takes over the accounts receivable invoices and takes responsibility for collections. In some cases, the financier may also provide cash debits retroactively if invoices are fully collected.

Most factoring companies will not be looking to buy defaulted receivables, rather focusing on short-term receivables. Overall, buying the assets from a company transfers the default risk associated with the accounts receivables to the financing company, which factoring companies seek to minimize.

In asset sale structuring, factoring companies make money on the principal to value spread. Factoring companies also charge fees which make factoring more profitable to the financier.

BlueVine is one of the leading factoring companies in the accounts receivable financing business. They offer several financing options related to accounts receivable including asset sales. The company can connect to multiple accounting software programs including QuickBooks, Xero, and Freshbooks. For asset sales, they pay approximately 90% of a receivables value and will pay the rest minus fees once an invoice has been paid in full. 

Loans

Accounts receivable financing can also be structured as a loan agreement. Loans can be structured in various ways based on the financier. One of the biggest advantages of a loan is that accounts receivable are not sold. A company just gets an advance based on accounts receivable balances. Loans may be unsecured or secured with invoices as collateral. With an accounts receivable loan, a business must repay.

Companies like Fundbox, offer accounts receivable loans and lines of credit based on accounts receivable balances. If approved, Fundbox can advance 100% of an accounts receivable balance. A business must then repay the balance over time, usually with some interest and fees.

Accounts receivable lending companies also benefit from the advantage of system linking. Linking to a companies accounts receivable records through systems such as QuickBooks, Xero, and Freshbooks, can allow for immediate advances against individual invoices or management of line of credit limits overall.

Underwriting

Factoring companies take several elements into consideration when determining whether to onboard a company onto its factoring platform. Furthermore, the terms of each deal and how much is offered in relation to accounts receivable balances will vary.

Accounts receivables owed by large companies or corporations may be more valuable than invoices owed by small companies or individuals. Similarly, newer invoices are usually preferred over older invoices. Typically, the age of receivables will heavily influence the terms of a financing agreement with shorter term receivables leading to better terms and longer term or delinquent receivables potentially leading to lower financing amounts and lower principal to value ratios.

Advantages and Disadvantages

Accounts receivable financing allows companies to get instant access to cash without jumping through hoops or dealing with long waits associated with getting a business loan. When a company uses its accounts receivables for asset sales it does not have to worry about repayment schedules. When a company sells its accounts receivables it also does not have to worry about accounts receivable collections. When a company receives a factoring loan, it may be able to obtain 100% of the value immediately.

Although accounts receivable financing offers a number of diverse advantages, it also can carry a negative connotation. In particular, accounts receivable financing can cost more than financing through traditional lenders, especially for companies perceived to have poor credit. Businesses may lose money from the spread paid for accounts receivables in an asset sale. With a loan structure, the interest expense may be high or may be much more than discounts or default write-offs would amount to.