Open account, Managerial Accounting

Open Account

Credit sales are usually on open account that implies which the seller ships the goods to the buyer and afterward sends the bill invoice.


In this type of terms, the goods are simply shipped to the consignee; they are not sold to the consignee. The consignee then sells such goods to the third party. One must note here that the title of the goods is retained through the seller till they are sold through the consignee to the third party. Sales proceeds are remitted through the consignee to the seller.

Negotiable Instruments/Hundi

While the goods are sold on credit either by an open account or by consignment a proper legal evidence of the buyers obligation is not made. In order to overcome this more secure agreement generally in the form of a draft is sought. A draft shows an unconditional order issued through the seller to the buyer asking the buyer to pay on demand or demand draft or at several futures specific date or time draft the amount given on the draft. The draft is generally accompanied through the shipping documents which are deliverable to the drawer while he pays or accepts the draft. Time drafts can be discounted along with the bank. The draft performs four helpful functions:

(a) This creates an evidence of buyer obligation

(b) This assists in reducing the cost of finance

(c) This gives liquidity to the seller

(d) This is a negotiable instrument.

Posted Date: 4/9/2013 5:10:50 AM | Location : United States

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