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"Bill and hold" is a term used to refer to an arrangement between a buyer and a seller in which the buyer is billed for goods or services that have not actually been received. The idea is that the products will be provided to the buyer on an agreed upon later date. As part of the arrangement, the seller agrees to set aside those products for the buyer, provide temporary storage for those products, and execute the delivery for the order once payment is received and recorded.
A bill and hold arrangement can be illustrated with the example of a company that places an order for a large number of pencils with a vendor. The buyer may want to pay for the order in the current accounting period but not want to take possession of the pencils until a later date, possibly due to the need to clear space for the pencils in a storage area. In this scenario, the seller agrees to process the order, and segregate the pencils to fill the order from the rest of its inventory. During this period, the buyer remits payment for the order and the seller records the purchase in the accounting receivables. On the date agreed upon by the two parties, the seller ships the pencils to the address provided by the buyer. Upon receipt of the shipped pencils, the order is considered filled by both parties.
While a bill and hold approach can sometimes be beneficial to both buyer and seller, managing the process can require some extra effort. Buyers have to keep track of anticipated delivery dates as well as submitting payment for those goods that are not yet received. Failure to do so can inflate actual inventory and present a false impression of which resources are actually available to use in various business processes. The seller also must track how much inventory has been committed to the buyer and make sure to not use that inventory to fill other pending orders.
Along with the potential pitfalls, it is important to recognize that use of a bill and hold arrangement is not always looked upon with favor by various regulatory agencies, and must be conducted in accordance with very strict requirements. For example, the Securities and Exchange Commission in the United States does not consider ownership of products to pass from seller to buyer until the buyer is in actual possession of those products, at which point the buyer is able to enjoy all rights and responsibilities connected with that ownership. This can mean that the buyer must observe certain regulations in terms of accounting for the funds expended on the purchase in order to comply with SEC rulings and regulations. In nations where a bill and hold process is more commonly utilized, both buyers and sellers must manage the accounting process associated so that there is no question of the current status of an order, including whether it has actually been received or if the delivery is still pending.
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