What is On Account
On account is an accounting term that denotes partial payment of an amount owed or the purchase/sale of merchandise or services on credit. For example, if a firm purchases $5,000 worth of merchandise on account, this refers to the purchase of the goods on credit and a deferral of payment.
On account can also be referred to as “on credit.”
BREAKING DOWN On Account
When a customer or business carries out a transaction on credit, an account known as accounts payable is created or increased. Accounts payable refers to the short-term debt that a company owes another business or its employees during its course of conducting business operations. For example, a company that purchases $10,000 worth of merchandise on credit from another business will have an increase to its accounts payable of $10,000. As it purchases more goods, this account will increase. The account will decrease as the company pays off its outstanding bills.
On account can refer to a number of bill or debt settlement events. When a business pays nothing or only a portion of the full payment for goods or services purchased, the purchase has been made on account. On account could refer to “payment on account” in which payment is made without any reference to a specific invoice. For example, a business that receives a payment from a customer or that makes a payment to a vendor with no reference attributed to an individual invoice will have the payment received or made on account. At a later date, these payments can be partially or fully matched to the related invoice.
Most lenders will accept payments on account. All installment payments of any kind, including mortgage payments, could be considered payments on account. Any purchases with credit can be referred to as “purchased on account.”
A business that owes a vendor, client or employees for services rendered will record the total amount as a debit in the accounts payable. Purchased on account signifies an increase to accounts payable and is used to reference goods that are purchased on credit. The journal entry remains until cash is paid, in full, to the entity owed. After the company pays the balance, the entry on the seller’s ledger will read as “paid on account.”
When payment is made against an account such that the entry in the accounts payable of a company’s books is no longer outstanding, it is referred to as paid on account. Paid on account is always a credit in the general ledger and signifies a decrease in accounts payable.