On Account

On account is a bookkeeping phrase meaning on credit. A sale on account is one where the customer receives goods or services now and pays later, creating an amount owed to the seller. A purchase on account is the reverse: the business receives goods or services now and pays its supplier later. Most sales between businesses are made on account, usually under agreed credit terms such as payment within 30 days.

Sales on account create accounts receivable for the seller, while purchases on account create accounts payable for the buyer. The phrase is also used for a payment "on account", meaning a payment toward an outstanding balance, often a partial one, that is not tied to a specific invoice.

A regular customer at a local hardware store may take what they need during the month and settle up at the end. The store writes each purchase in its book under the customer's name. That customer is buying on account.

In business, buying on account is normal. A café orders coffee beans and the roaster sends them with an invoice due in 30 days. The roaster has made a sale even though no money has arrived, and the café has a bill to pay even though it has not paid yet. The accounts show both facts.

Under the accrual basis of accounting, a sale on account is recorded when the goods or services are delivered, not when cash is received. Suppose a wholesaler sells goods for $2,500 on terms of 2/10, net 30, meaning the customer may take a 2 percent discount if it pays within 10 days, and otherwise must pay the full amount within 30 days.

• At the sale, the wholesaler debits Accounts Receivable $2,500 and credits Sales $2,500. Under a perpetual inventory system it also records cost of goods sold.
• If the customer pays within 10 days, the wholesaler debits Cash $2,450 and Sales Discounts $50, and credits Accounts Receivable $2,500.
• If the customer pays after the discount period, it debits Cash and credits Accounts Receivable for the full $2,500.

The customer records the mirror image: a debit to Inventory or Purchases and a credit to Accounts Payable, and later a debit to Accounts Payable and credits to Cash and, if taken, a purchase discount.

Each customer's and supplier's balance is tracked in a subsidiary ledger, whose total must agree with the control account in the general ledger. The source document for most transactions on account is the invoice.

A payment on account is money received toward a customer's balance without being matched to a particular invoice, or a deposit paid before goods are supplied. If a customer owing $7,000 across three invoices sends $3,000 "on account", the seller credits the customer's account for $3,000 and later applies the payment to specific invoices, often the oldest first. Until the payment is applied, it may appear as unapplied cash. A payment received before any goods or services are delivered is not revenue; it is a liability, often called customer deposits or unearned revenue.

Selling on account helps win customers but carries the risk that some will pay late or not at all. Businesses manage this by checking customers' creditworthiness, setting credit limits and reviewing an aging of accounts receivable each month. Under US GAAP, sellers estimate expected credit losses and record an allowance for doubtful accounts, so receivables are reported at the amount expected to be collected. Analysts watch measures such as days' sales in accounts receivable to see how quickly credit sales turn into cash.

On the buying side, purchasing on account is a form of short-term, usually interest-free financing from suppliers. Paying too late damages supplier relationships and may forfeit discounts, while paying too early gives up the cash benefit, so businesses schedule payments to match their terms.

Because sales on account are recorded before cash arrives, net income and operating cash flow can differ significantly. An increase in receivables during the year means some revenue has not yet been collected, and it is subtracted from net income in the operating section of the statement of cash flows under the indirect method; an increase in payables is added back. Fast-growing businesses that sell on account often report profits while running short of cash, which is why lenders look closely at credit sales and collection patterns.