Account Settlement: Definition, Types, Example

What Is an Account Settlement?

An account settlement generally refers to the payment of an outstanding balance that brings the account balance to zero. It can also refer to the completion of an offset process between two or more parties in an agreement, whether a positive balance remains in any of the accounts. In a legal agreement, an account settlement results in the conclusion of a business dispute over money.

Understanding Account Settlements

The accounts receivable department of a company is charged with the account settlement process of collecting money owed to the firm for providing goods or services. The ages of the receivables are broken down into intervals such as 1–30 days, 31–60 days, etc. Individual accounts will have amounts and days outstanding on record, and when the invoices are paid, the accounts are settled in the company's books.

In cases of two or more parties, related or unrelated, account settlement would take place when one set of agreed-upon goods is exchanged for another, even if a zero balance is not required.

Types of Account Settlements

Account settlements are also used in the insurance industry. Pacific Mutual Holding Company, an insurer, explains its accounting policy for offsets with reinsurance companies:

Amounts receivable and payable to reinsurers are offset for account settlement purposes for contracts where the right of offset exists, with net insurance receivables included in other assets and net insurance payables included in other liabilities.

For a legal settlement, it’s usually when a business matter or account is resolved. In particular, a business account dispute. The finalization of the dispute means there’s a legal record of the terms of the settlement. 

Example of an Account Settlement

A steel manufacturer agrees to supply flat-rolled sheets to a furnace equipment maker in exchange for an industrial furnace to be delivered in six months. The value of the furnace exceeds the value of the steel sheets, but the account settlement takes place (with a credit balance to the furnace manufacturer) when the transaction is completed. In the case of business litigation in which one party sues another for breach of contract and seeks monetary damages, for instance, account settlement would occur if the parties decide to resolve their dispute before going to court.