Distinguish between open item and balance forward processing of Accounts receivable. Give an example of where...

Distinguish between open item and balance forward processing of Accounts receivable. Give an example of where each would be used (what type of business and why). Which is most common? What are you most familiar with?

Expert Solution

Let's distinguish between open item account and balance forward.

Basis.	Open item.	Balance Forward

Meaning	In this account, transactions done by individuals is detailed in the statement of the customers for the time the transaction is declared paid	Here the transaction is maintained only fir the current period, after that it is consolidated and brought as a total for next period.
Multicurrency transactions	It is possible for this open item account	It is not possible for Balance forward account.
Aging	Aging is done here at any time in the month after initiating process of aging.	Aging is done as Balance forward consideration which happens when the paid transaction are removed.
Aging period count	Here at most 7 aging periods.	Here 2 aging periods basically, current and non current period.
Petiod of financial charges	Financial charges are assigned after aging of this account.	Here first financial charges are assigned and then account is aged or consolidated.
Posting of transaction.	Here it is such that payments can be made to be posted to various invoices.	Here ipayent is posted automatically in the current balance.

If we talk about type of business where they are used, first the open item accounts are used by businesses who believe to track all the transactions that are not being settled.

Suppose a business namely sole properitor usually uses open item accounts. The owner keeps the record open of all the transactions which are not settled. As he is involved in business at small level he is not competent with various softwares that will maintain the transactions well. And thus he will prefer using open item accounts. When a particular transaction is settled he closes that account.

Now let us discuss an example using balance forward processing of account. Suppose there is an well established organization basically an audit firm. It has well developed softwares to take care of all transaction happening day to day. If transactions are made to close even after they are not settled, it will automatically add to the new period and hence records are properly maintained. So organisation that have well developed softwares and advancement to carry this balance forward are using this automatically updated accounts.

If we see which is more familiar then we can say that balance forward account is more familiar. Almost every organization now is using this. Only firms that are run at very small level or are not having enough knowledge to adopt this method, are using open item.

Balance forward method is more reliable as data is automatically updated and there is less chance of data to be misleaded.

Organizations while using balance forward method, need not to worry about the transactions as they are periodically updated with full accuracy. Management can depend on the results from this account so it is more common.

I am more familiar with the balance forward method because now a days it is more being seen in organization than the open item account. But at times I usually see this open item account used by local shopkeepers in my locality who are small busi ess people.

ekkarill92 answered 2 years ago

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