What is <update handle="customer_account"/>?

Each page on a Magento website has a handle. That handle equates to a layout XML file. For example, <update handle="customer_account"/> indicates to Magento’s layout system that it should take into account any directives contained within the customer_account.xml file. This particular file is used commonly amongst the various pages within the customer’s account in the secure, logged in area.

default.xml provides layout updates common to all pages on the site.

So, to tie it all together, the customer’s account pages use at minimum the default.xml and customer_account.xml file to determine the layout of those pages.

The handle translates to a layout XML file.

Update is used to include a certain layout xml file.

The handle declared in the tag is included.

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You can check about layout handles here