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What is an open account?

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An open account is an agreement with a business where the customer can pay for goods at a later date within an agreed upon period. In other words, an open account is an account which still needs to be paid.

An open account is also known as an account payable. Examples of open accounts are: trade credits that aren’t paid fully, a deferred payment schedule for an item, a past due account, and so on.

What are some disadvantages to using open accounts?

  • Credit risk: Businesses might not receive payment from the buyer on time or at all.
  • Delivery risk: Delays, damages, or losses may prevent the buyer from receiving the goods as expected.
  • Compliance risks: If the customer or business doesn’t comply with the laws and regulations of the countries involved in the transaction, it can result in fines, penalties, or legal actions.
  • Negotiation risks: Customers or businesses might not agree on the terms and conditions of the payment or delivery. This can result in misunderstandings or conflicts that could damage the relationship between the parties.
  • Operational risks: The customer or business could face operational challenges or errors impacting the transaction. Human error, system failures, or external factors such as weather or accidents can increase operational risks.

What is an example of an open account?

A company in the UK purchases software from a US-based company. The two businesses agree on an open account transaction. The US company sends the software to the UK company. The UK business makes sure the software works before remitting the payment. In this situation, the UK business can verify the items before sending payment.

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