What Does It Mean to Purchase on Account?

“Purchasing on account” is a common business practice where transactions occur without immediate cash exchange, allowing businesses to acquire goods or services from suppliers by promising to pay later. This method facilitates continuous operations, enabling businesses to maintain inventory or procure services even when immediate funds are not available.

Defining “Purchase on Account”

“Purchasing on account” refers to buying goods or services on credit from a vendor. The buyer receives items or services immediately, with payment deferred to a future agreed-upon date. This is a prevalent business-to-business (B2B) transaction.

The seller extends credit to the buyer. This process helps businesses manage their working capital more effectively. The buyer benefits from acquiring resources without impacting immediate cash reserves, while the seller secures a sale, expecting payment within the stipulated terms.

The Mechanics of Buying on Account

The process begins with an agreement between the buyer and seller. Once terms are established, the seller delivers the goods or services. Following delivery, the seller issues an invoice detailing the items purchased, total amount due, and specific payment terms.

Common payment terms include “Net 30,” “Net 60,” or “Net 90,” meaning the full invoice amount is due within 30, 60, or 90 days. Sellers sometimes offer a discount for early payment, such as “2/10 Net 30” (a 2% discount if paid within 10 days, otherwise the full amount is due in 30 days). The buyer is expected to make payment within this agreed-upon timeframe.

Accounting for Purchases on Account

From the buyer’s perspective, when goods or services are purchased on account, the company records an increase in an asset or expense account. Simultaneously, a corresponding increase is recorded in “Accounts Payable,” a liability account representing short-term debt owed to the supplier. When the buyer makes payment, the Accounts Payable liability is reduced, and the Cash account is also decreased.

From the seller’s standpoint, the transaction involves recording a debit to “Accounts Receivable,” an asset account representing money owed to the business. A corresponding credit is made to a revenue account, recognizing the income earned. When payment is received, the Cash account increases, and the Accounts Receivable balance reduces. These transactions impact the balance sheet (affecting assets and liabilities) and influence the income statement through revenue recognition.