On Account

On Account: Definition, Journal Entries, and Examples

Definition

“On account” means a purchase or payment made on credit or a partial payment applied to an outstanding balance. It can describe:
– A buyer acquiring goods or services on credit (purchase on account).
– A payment made against an existing account balance without specifying a particular invoice (payment on account).

Key points

• Purchases on account create or increase accounts payable (for the buyer) or accounts receivable (for the seller).
• Payments on account reduce the outstanding balance and are recorded against the account (not necessarily against a specific invoice).
• Accurate matching of payments to invoices and timely reconciliation of payables/receivables are essential for correct financial reporting.

How it works

• Purchases on account: When a buyer obtains goods or services on credit, the buyer records the purchase and increases accounts payable. The seller records the sale and increases accounts receivable.
• Payments on account: When a payment is made against the owed balance (full or partial), the payer reduces accounts payable; the recipient reduces accounts receivable. Payments may be applied to the account as a whole and later matched to specific invoices.

Typical journal entries

Buyer (purchases on credit)
* At purchase:
– Debit: Inventory or Expense (amount of goods/services)
– Credit: Accounts Payable (same amount)

• When making a payment (full or partial):
• Debit: Accounts Payable (amount paid)
• Credit: Cash/Bank (amount paid)

Seller (sales on credit)
* At sale:
– Debit: Accounts Receivable (amount billed)
– Credit: Sales/Revenue (same amount)

• When receiving payment:
• Debit: Cash/Bank (amount received)
• Credit: Accounts Receivable (amount received)

Examples

1) Purchase on account
– A business purchases $5,000 of merchandise on credit.
– Debit Inventory (or Cost/Expense) $5,000
– Credit Accounts Payable $5,000
– Result: The business owes $5,000 until payment is made.

2) Partial payment on account
– The business later pays $2,000 toward that balance.
– Debit Accounts Payable $2,000
– Credit Cash $2,000
– Remaining payable balance: $3,000

3) Payment applied without invoice reference
– A customer owes a vendor $20,000 total. They send a $10,000 payment with no invoice reference.
– Vendor:
– Debit Cash $10,000
– Credit Accounts Receivable $10,000
– The vendor later applies the payment to specific invoices when reconciling.

Practical considerations

• Maintain detailed records linking payments to invoices when possible to simplify reconciliation and month-end close.
• Use consistent procedures for applying undirected payments (e.g., oldest invoice first) and document them.
• Regularly reconcile accounts payable and accounts receivable to detect errors or unrecorded transactions.

Bottom line

“On account” refers to credit purchases or payments applied against outstanding balances. Proper journal entries and disciplined recordkeeping ensure accurate financial statements and easier reconciliation of payables and receivables.