Open-item accounting as an alternative

Smaller businesses often utilize an open-item accounting system in their credit transactions with customers and suppliers, which means that no separate personal debtor or creditor accounts are maintained for these business partners.

Both for the customer and the supplier, instead of individual debtor and creditor accounts, two folders are maintained each.

1. Folder for outstanding invoices

The first folder contains all unpaid customer and supplier invoices. Invoices coming in and going out are only filed in the folder, i.e., they are not booked. Credits for returns, discounts, and cash discounts are deducted on the invoices. When a payment is made by a customer or supplier, the respective invoice is removed from the folder, marked as paid, and filed in the folder for paid invoices (see below 2.). The debtor and creditor accounts are dormant, i.e., nothing is booked on these accounts until the annual closing. During the inventory at the end of the year, the outstanding invoices are summed up, which results in the debtor and creditor inventories for the final balance sheet. Changes in the inventory of outstanding invoices compared to the beginning of the year must be booked as follows:

• Inventory increase: Debtors/Goods revenue or Goods expense/Creditors
• Inventory decrease: Goods revenue/Debtors or Creditors/Goods expense

2. Folder for paid invoices

The paid invoices are filed in this folder. The sale or purchase is booked as a cash transaction upon payment:

• Goods purchase: Goods expense/Liquid assets
• Goods sale: Liquid assets/Goods revenue

Note

Typically, the open-item accounting system is chosen by small companies that book goods purchases as goods expense. The inventory of goods is managed as a dormant account (see blog entry). The content of this blog entry is based on the assumption that goods purchases are booked as goods expense.