Open transactions are financial assets that are not fully settled at the end of an accounting period. They are common in businesses that do not rely on immediate payments and can be managed through tracking and monitoring to ensure financial stability.
Open transactions are any type of financial asset that is not considered fully settled at the end of a given accounting period. Commercial transactions of this type remain open until finally settled in full at a later period. Because many types of companies operate with a process that creates pending transactions that can remain unstable over a period of several weeks or even longer, most accounting systems provide some means of tracking the ebb and flow in open transactions such as part of the fundraising process, and to keep abreast of what type of income can be generated in one or more upcoming periods.
One of the easiest ways to understand open transactions is to consider buying goods or services from a company where the debt is not paid immediately by the buyer making a cash payment at the time of purchase. In this type of setup, the seller typically issues an invoice to the buyer, who then has a certain number of calendar days in which to make full payment. Assuming the transaction occurs in the middle of a accounting month and the payment deadline is 30 days, the buyer may not make payment in that current accounting month. In this case, the transaction is identified as open or pending at the close of that accounting month.
Almost any business that does not rely on immediate payments for goods or services will have open transactions that need to be accounted for in the company’s financial records. The aging process helps keep abreast of the status of those open trades and provides an opportunity to determine if a given trade has been open for an unusual amount of time. For example, if a particular invoice is now 45 days old and the customer typically pays between 28 and 30 days, the company can initiate contact with the customer to ensure that the invoice has been received. From this point of view, monitoring the status of open transactions makes it easier to manage collections activities and corrects oversights or other problems that could delay receiving payments from customers.
Managing the amount of open transactions is very important to the financial stability of any business. In order to ensure that sufficient revenue is consistently received to service business debts, companies often organize their billing processes to give customers ample opportunity to remit payments as quickly as possible. Something as simple as knowing which days of the month a customer sets aside to cut checks for outstanding invoices and the time frame for delivering an invoice to that customer can help shorten the reversal between billing and payment receipt, a strategy that helps also to keep the number and monetary value of open transactions within an acceptable range.
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