Open items refers in accounting to individual receivables and payables arising from issued invoices that have not yet been paid or settled. Each open item remains visible in the accounts receivable or accounts payable ledger until a payment or other settlement (cash discount, reduction, reversal) occurs.
Fundamentals and legal context
Open items arise from deliveries and services on credit and affect in the balance sheet the receivables from deliveries and services (assets) as well as the liabilities from deliveries and services (liabilities). For accounting treatment, the commercial law provisions of the HGB and tax rules apply, for example for write-downs of doubtful receivables in the annual financial statements and the VAT rules under the UStG.
Typical accounting entries for invoice issuance and settlement:
- Invoice to customer: Accounts receivable to Sales revenue and VAT (e.g., Accounts receivable €1,190 to Sales revenue €1,000 and VAT €190).
- Invoice from supplier: Expense and Input VAT to Accounts payable (e.g., Expense €1,000 and Input VAT €190 to Accounts payable €1,190).
- Receipt/payment: Bank to Accounts receivable or Accounts payable to Bank.
Practical application in daily bookkeeping
In practice, consistent open-item accounting increases transparency and simplifies the dunning/collections process, cash flow planning and determination of payment terms. Instead of a single running account, individual invoices are kept as separate line items and are explicitly cleared when payment is received.
Benefits
- Clear traceability of individual receivables and payables.
- Automatic dunning and documentation of cash discounts, partial payments and reversal entries.
- Simplified aging analysis to assess the risk of receivable defaults.
Example calculation with cash discount (Skonto)
Delivery: Net amount €1,000 + 19% VAT = €1,190 invoice amount. Customer takes a 2% cash discount (on net): Discount €20, VAT correction €3.80, amount to be paid €1,166.20.
- Entry on payment: Bank €1,166.20 to Accounts receivable €1,190.00
- Additionally: Cash discount expense €20.00 and VAT €3.80 to write off the remaining receivable (or booked off separately).
Organization, control and dunning
For freelancers and small businesses a structured open-item process is important:
- Creation and archiving of outgoing invoices (with due date).
- Continuous maintenance of the open-item list in the accounting software (e.g., DATEV, Lexware, sevDesk).
- Regular reconciliation with bank statements: matching incoming payments to open invoices.
- Dunning process: polite payment reminder, dunning notice with deadline, if necessary involvement of a collection agency or court dunning procedure.
In dunning it is important to know the statutory default interest (§288 BGB) and to distinguish between consumer and business transactions. As a business you can claim default interest; the interest claim should then be recorded as an open item with interest receivable.
Accounting, risk and annual financial statements
Open items have direct effects on the annual financial statements. Receivables must be assessed for recoverability. If there are doubts, an individual valuation allowance or a general valuation allowance should be made. Uncollectible receivables must be written off as bad debt.
Key points
- Valuation under the HGB: principle of prudence; doubtful receivables reduce profit.
- Tax treatment: write-downs are tax-deductible only under certain conditions (relevant under the EStG).
- Documentation: transparent open-item reconciliation at month- or year-end is the basis for auditability in a tax audit.
Practical tips and checklist
Use the following practical recommendations to make your open-item management efficient:
- Maintain accounts receivable and accounts payable in the open-item system, especially if you have many credit invoices.
- Use automatic matching via payment reference and invoice number to reduce manual work.
- Perform regular aging analyses (30/60/90 days) to detect potential payment defaults early.
- Monitor cash discount deadlines and plan payment runs to take advantage of liquidity benefits.
- At month-end reconcile open items with account balances and document the reconciliation.
Clean open-item accounting is indispensable for liquidity management and legally compliant documentation in Germany. It also supports customer communication, receivables management and preparation of the annual financial statements.