What is On Account?
On account is athat describes situations in which a customer makes a partial payment for goods or services purchased.
How Does On Account Work?
In the business world, buying things on account is the same as creating accounts payable. For example, let's assume that Company XYZ orders $1 million in widget parts from its supplier.
Company XYZ pays the supplier $100,000 andthe other $900,000 on account. This basically means it pay the rest later -- let's say in 60 days.
Why Does On Account Matter?
Buying things on account is similar to saying, "accounting. Once Company XYZ places its order and/or receives the parts, it increase its inventory account by $1 million, decrease its by $100,000, and increase its by $900,000. When 60 days has passed and Company XYZ pays the invoice, it reduce cash by $900,000 and reduce its accounts payable by $900,000.it on my tab." Eventually, however, you have to pay the tab. In our example, the transaction requires careful
Technically, any kind of installment loan (such as your or car ) is akin to putting something on account. In the business world, putting things on account usually creates accounts payable (or ). A/P is a , and as such, it appears on the balance sheet.
In turn, when accounts payable go down, this is considered a use of cash on the company's cash flow statement, and as such, it reduces the company's working capital (defined as current assets minus current liabilities). When accounts payable goes up, this is considered a source of cash on the company's cash flow statement because the company is "stretching out" the time it takes to pay its invoices and thus not using cash as quickly.