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What are business transactions that indicate credit has been extended without a formal contract called?
Open-book accounts
Secured accounts
Formal accounts
Contractual accounts
The correct answer is: Open-book accounts
The term "open-book accounts" refers to business transactions where credit has been extended without a formal contract. In this context, the relationship between the creditor and debtor is maintained through a series of informal agreements and ongoing records of transactions rather than a binding written contract. This practice often applies in scenarios where frequent transactions occur, such as in retail environments or ongoing service relationships, allowing flexibility and ease of access for both parties. Open-book accounts rely heavily on trust and the ongoing business relationship, making them practical for certain types of trade. The absence of a formal contract means that the terms may be more fluid, but this can also lead to potential misunderstandings if not properly managed. In contrast, secured accounts usually involve a formal agreement backed by collateral, which is not the case with open-book accounts. Formal accounts and contractual accounts also imply the existence of a written agreement, which distinguishes them from the more casual nature of open-book accounts. Thus, understanding the classification of these transactions helps clarify the nature of credit relationships in business.