“On account” is an accounting term that signifies part payment of an amount due or the occurrence of purchases and sales on credit. This term can be interchangeably used with “on credit.”
Key Insights
- The term ‘on account’ is utilized in accounting contexts to indicate either partial payments or credit purchases.
- Purchases on account refer to acquisitions made on credit, increasing accounts payable.
- Payments on account are made against an account to reduce the outstanding balance.
Mechanisms of ‘On Account’
Credit Purchases on Account
When a customer or business procures goods or services on credit, an account called accounts payable is either created or adjusted. Accounts payable represents the short-term debt a company owes during standard business activities. As more purchases are made on credit, accounts payable increases. Conversely, it’s reduced when the company pays off its liabilities.
Any transaction made with credit can be classified under ‘purchases on account.’ An organization records this by making a credit entry, raising accounts payable, reflecting the raw balance due until the cash is entirely paid to the creditor. Payments toward this debt reduce accounts payable via a debit entry. Such payments are common and recognized by most lenders.
Expanded Example
Consider a scenario where a business purchases $5,000 worth of merchandise on account. This points to the acquisition of the items with deferred payment. The company’s accounts payable will escalate by $5,000, representing that the payment hasn’t occurred by the merchandise delivery time.
Types and Applications of ‘On Account’
‘On account’ covers various billing or debt-settling situations. One instance is the ‘payment on account,’ where a payment is forwarded towards a customer’s account without targeting a specific invoice.
Such actions are prevalent in industries offering goods and services on credit. Customers typically settle accounts amid unbilled purchases, a common scenario within credit-dominant sectors.
Practical Example
Imagine a customer with a $20,000 balance outstanding with a vendor. The customer commits to paying $10,000, with no specific invoice cited. This payment gets allotted to the overall outstanding balance, and the connection with particular invoices can occur later. Usually, customers have a distinct timeframe to fully clear a given invoice, irrespective of the credit extension.
Accurate record-keeping of accounts payable and receivable is paramount to accounting precision. Proper attention helps correctly correlate on-account payments with their corresponding invoices, ensuring timely reconciliations at the month’s, quarter’s, or year’s closing.
Related Terms: accounts payable, general ledger, purchase on credit.
