Open account definition
/What is Open Account?
An open account is an arrangement between a business and a customer, where the customer can buy goods and services on a deferred payment basis. The customer then pays the business at a later date. This arrangement is typically capped by the maximum amount of credit that the organization is willing to extend to the customer. The amount of credit that the seller is willing to accept is based on a mix of the historical payment record of the customer, its credit rating, and its financial condition as shown on its financial statements.
When purchases are made under this arrangement, the seller does not charge interest to the buyer. However, if the customer is unable to pay within a reasonable period of time, the parties may convert the outstanding balance into an interest bearing note, in which case the customer will be obligated to pay interest as it gradually pays down the outstanding balance over a period of time.
The open account concept also refers to any account that has a non-zero balance.
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Example of an Open Account Arrangement
An example of an open account arrangement can be seen in a relationship between a wholesale distributor and a retail store. The distributor supplies inventory—such as packaged food or beverages—to the retailer on credit, with payment terms of "net 30," meaning the retailer has 30 days to pay after receiving the goods. The retailer does not pay upfront, but agrees to settle the balance within the agreed period, allowing it to sell the goods and generate revenue before payment is due. This arrangement helps the retailer manage cash flow while fostering an ongoing business relationship with the distributor.