What Is Lag in Accounting?

Business and accounting terminology contains myriad words and phrases unknown to those living beyond the walls of these worlds. One such term, “accounting lag,” subscribes to a relatively broad and vague definition. Given its open nature, the term applies to a variety of specific situations, the general conditions of which coincide with the basic parameters of an accounting lag. Various terms relate to or even stem from accounting lag, including billing lag.

Business and Accounting Lags

In the terminology of business and accounting, a lag constitutes a period of time that transpires between two notable and related events. A lag may also refer to a process that falls behind in progress. Various reasons for lags exist, some intentional, others unintentional. Some lags relate to time lapses inherent in business processes, while others stem from negligence on the part of one party involved in a business deal. In accounting, a lag usually constitutes the time transpired between the beginning and ending of a single process or transaction.

Types of Accounting Lags

Various types of accounting lags exist. The most basic type of accounting lag occurs between the start and end of a transaction. Such accounting lags exist for various reasons, including the necessary lag required when processing payment and totaling accounts and the failure to make payment when due on the part of a client. A billing lag represents the time period between the incurring of costs and the billing of customers. An accounting lag also can be the inability to adapt administrative or technological changes to an accounting department in keeping with contemporary trends, thus allowing the department to fall behind the times.

Impacts of Accounting Lags

Basic accounting lags, or time transpiring between the opening and closing of an account, impact the nature of financial bookkeeping by companies. Accounting departments work intentional lags, such as billing lag or one due to account processing, into their bookkeeping cycle. Unintentional lags, however, such as those due to late payment from a client, impede an accounting department’s ability to balance its books and apportion future budgetary funding due to a deficit. An accounting lag like the one occurring when a company proves slow to make administrative or technological changes negatively impacts an accounting department by disallowing it to stay abreast of contemporary methods of accounting and accounting technology. This may hinder a company’s ability to keep up with competitors or maintain a cost-effective accounting process.

Income Lag

Though the accounting income and economic income of a company prove identical in the long term, a short-term lag occurs between these two figures when companies use them as methods of revenue assessment. Economic income constitutes the projected cash flow and revenue stream of a company for a specific period based on current figures. Accounting income constitutes more or less the same thing, though companies only calculate accounting income when receiving actual capital, rather than basing the income on outstanding accounts and money in transition from clients and other revenue streams. The accounting lag in such instances occurs between the development of an economic income projection and the accumulation of all revenue upon which such a projection is based, which constitutes the accounting income.