Open-Item Versus Balance-Forward Accounting

If you practice open-item accounting, you match payments against bills. The term "open-item accounting" is used to describe this accounting practice because:

• Payments are matched against "open items" (i.e., unpaid bills and adjustments)
• Only unmatched bills and adjustments (i.e., open items) affect aged debt.

Contrast open-item accounting with "balance-forward" accounting - in a balance-forward world, payments are not matched to bills. Rather, payments implicitly relieve a customer's oldest debt. For example, consider the following unpaid financial transactions that exist for an account and the resultant aged debt.

In a balance-forward world, if a $1,000 payment was made on 9-Mar-00, the customer's aged debt would look as follows:

Notice how the $1,000 payment relieves the 62 day old debt - it does this because, in a balance-forward world, payments payoff oldest debt first.

However, let's assume the customer wants the payment to settle their electric debt (e.g., because they disagree with the gas bills). If you could match the $1,000 payment to the two electric bills (i.e., open-item accounting exists), the customer's aged debt would look as follows:

In sum,

• In an open-item world, payments are matched to bills and only unpaid bills and adjustments (i.e., open items) affect aged debt.
• In a balance-forward world, payments are not matched to bills and therefore a customer's aged debt is computed by aging debits (bills and adjustments) and then relieving the oldest debits using credits (payments and adjustments).