What is On Account?
On account is an accounting term that denotes a partial payment of an amount owed or the purchase/sale of merchandise or services on credit. On account can also be referred to as “on credit.”
How On Account Is Used
Purchases On Account
When a customer or business makes a purchase on credit, a general ledger account known as accounts payable is created or increased. Accounts payable refers to the short-term debt that a company owes another entity during the course of conducting business operations. As the company purchases more goods on credit, this account will increase. The account will decrease as the company pays off its outstanding bills.
For example, if a business purchases $5,000 worth of merchandise on account, this refers to the purchase of the goods on credit and a deferral of payment. The business will have an increase to its accounts payable of $5,000.
Any purchases made with credit can be referred to as “purchased on account.” A business that owes another entity for goods or services rendered will record the total amount as a debit entry to increase accounts payable. The outstanding balance remains until cash is paid, in full, to the entity owed.
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. Payments made on account decrease accounts payable as a credit entry to the account. Most lenders will accept payments on account. All installment payments of any kind, including mortgage payments, could be considered payments on account.
On account can refer to a number of bill or debt settlement events. On account could refer to “payment on account” in which payment is made against a certain customer's account without any reference to a specific invoice.
For example, a customer has a $20,000 outstanding balance due to a vendor. The customer makes a $10,000 payment to the vendor with no reference attributed to an individual invoice. The payment made will be applied against the outstanding balance as a whole. At a later date, the payments can be partially or fully matched to the related invoice.