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.


The figure indicates how the unpaid financial transactions of an account result in aged debt in the balance forward accounting method.

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:


The figure lists the scenario of the balance-forward accounting world, where payments are used to payoff the oldest debt on priority.

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 his electric debt (e.g., because he disagrees 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:


The figure lists the scenario of the open-item accounting world, where a payment of $1000 is matched against the unpaid bills and adjustments of the account.

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).
Note: Financial Transactions and Bills. In an open-item world, only bill segments and adjustments are presented on a bill. When a bill is completed, only those bill segments and adjustments to be presented are swept onto a bill. Payment and payment cancellation FTs, bill segment FTs canceled before bill completion together with their corresponding bill segment cancellation FTs, and adjustment FTs marked as do not show on bill are not swept onto a bill. An adjustment's adjustment type and its algorithms determine if its FT will show on a bill by default.