Open Account Definition
Open account, defined as an account which remains to be paid, is also known as an account payable by the bearer. Their terms exist in a multitude of situations: trade credit which is not fully paid, a deferred payment schedule for an item, a past due account, and more. An open account credit can even exist where an account is open because there is a positive balance which has yet to be spent.
Open Account Explanation
Open account, explained also as an account which will be paid upon completion of a project or delivery of a product, exists almost anywhere in the business world. In fact, many companies have both open accounts with customers as well as open accounts with vendors. Whether a company has not yet received a bill or is behind payment, received deferred payment or credit terms, or any other situation where product has been delivered but not yet paid for an open account payment terms exist. When full payment is received the account is then considered closed. Open accounts can even exist for intangible goods; a brand name has been transferred but has some balance.
Open Account Example
Madeline has several open accounts in the name of her company: she has trade credit for her food products, has receiving third party financing for a delivery truck used for her business, and even has an unpaid balance with her landlord. This does not mean Madeline’s business is under financial distress and is experiencing open account debt; quite the contrary. Madeline is actually managing her finances well. She chooses to pay bills at the last moment in order to reserve cash for operations. An open account basis is the center of Madeline’s cash flow strategy. This does not mean that she neglects her bills, she just sends payment so that it is received on the last day before it is considered late. Madeline must manage this carefully but knows she can take advantage of the time and cash to better her situation.
If you are ready to add real value to your company, then click here to download our 5 Ways a CFO Adds Value whitepaper.
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?