Customer purchases to be paid at a later date
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What are Credit Sales?
Credit sales referto a sale in which the amount owed will be paid at a later date. In other words, credit sales are purchases made by customers who do not render payment in full, in cash, at the time of purchase. To learn more, check out CFI’s Credit Analyst Certification program.
Types of Sales Transactions
There are three main types of sales transactions: cash sales, credit sales, and advance payment sales. The difference between these sales transactions simply lies in the timing of when cash is received.
1. Cash sales: Cash is collected when the sale is made and the goods or services are delivered to the customer.
2. Credit sales: Customers are given a period of time after the sale is made to pay the seller.
3. Advance payment sales: Customers pay the seller in advance before the sale is made.
Credit Terms and Credit Sales
It is common for credit sales to include credit terms. Credit terms are terms that indicate when payment is due for sales that are made on credit, possible discounts, and any applicable interest or late payment fees.
For example, the credit terms for credit sales may be 2/10, net 30. This means that the amount is due in 30 days (net 30). However, if the customer pays within 10 days, a 2% discount will be applied.
Assume Company A sold $10,000 worth of goods to Michael. Company A offers credit terms 5/10, net 30. If Michael pays the amount owed ($10,000) within 10 days, he would be able to enjoy a 5% discount. Therefore, the amount that Michael would need to pay for his purchases if he paid within 10 days would be $9,500.
How to Record a Credit Sale
On January 1, 2018, Company A sold computers and laptops to John on credit. The amount owed is $10,000, due on January 31, 2018. On January 30, 2018, John made the full payment of $10,000 for the computers and laptops.
The journal entries would be as follows:
| Date | Account Title | Debit | Credit |
| January 1, 2018 | Accounts Receivable | $10,000 | |
| Sales | | $10,000 |
| To record the sale of goods to John on credit |
| Date | Account Title | Debit | Credit |
| January 30, 2018 | Cash | $10,000 | |
| Accounts Receivable | | $10,000 |
| To record the full payment made by John for purchases on January 1, 2018 |
How to Record a Credit Sale with Credit Terms
Consider the same example above – Company A selling goods to John on credit for $10,000, due on January 31, 2018. However, let us consider the effect of the credit terms 2/10 net 30 on this purchase.
The journal entries would be as follows:
| Date | Account Title | Debit | Credit |
| January 1, 2018 | Accounts Receivable | $10,000 | |
| Sales | | $10,000 |
| To record the sale of goods to John on credit |
John decides to take advantage of the credit terms and thus pays on January 5, 2018:
| Date | Account Title | Debit | Credit |
| January 5, 2018 | Cash | $9,800 | |
| Cash Discount | $200 | |
| Accounts Receivable | | $10,000 |
| To record the sale of goods to John on credit with the credit discount |
John paid his invoice four days (January 5) after purchasing the goods on credit. Therefore, he would be able to enjoy a 2% discount on his credit purchase ($10,000 x 2% = $200).
Advantages and Disadvantages of Credit Sales
As previously mentioned, credit sales are sales where the customer is given an extended period to pay. There are several advantages and disadvantages for a company offering credit sales to customers.
Advantages
- Credit sales can be used to more easily acquire new customers. Offering credit can attract new customers to purchase from the company.
- Customers are sometimes without enough cash on hand. Offering credit gives customers the flexibility to go ahead and buy now and pay for purchases at a later date.
Disadvantages
- Customers can potentially go bankrupt. If customers go bankrupt, the amount owed may be unrecoverable and must be written off.
- Costs of collection may decrease profits. If a customer misses the payment or refuses to pay, the company may incur collection costs in trying to obtain the payment.
More Reading
Thank you for reading CFI’s guide to Credit Sales. To develop your career in corporate finance, these additional CFI resources will be helpful:
FAQs
What are Credit Sales? Credit sales refer to a sale in which the amount owed will be paid at a later date. In other words, credit sales are purchases made by customers who do not render payment in full, in cash, at the time of purchase. To learn more, check out CFI's Credit Analyst Certification program.
What does credit sale mean? ›
Credit sales are a type of sale in which the customer is allowed to purchase goods or services now and pay for them later. This differs from cash sales, which are another common sale type.
What is another name for credit sales? ›
Credit sales are also known as sales made on account.
Is credit sales the same as accounts receivable? ›
Credit sales are income generating items recorded in profit and loss statements, while accounts receivables are short-term assets recorded in the balance sheet. Both are derived from credit sales and use the same documents. Credit sales increase income, while accounts receivables increase total assets.
What is the entry for credit sales? ›
Credit sales journal entry refers to the journal entry which is recorded by the company in its sales journal when the company makes any sale of the inventory to a third party on credit. In this case, the debtor's account or account receivable account is debited with the corresponding credit to the sales account.
What are examples of credit sales? ›
For example, if I go to a computer shop on July 1st and purchase a laptop with a promise to pay for the computer on July 31st, then it is a credit sale. In a credit sale, the buyer can pay at a later time using any acceptable form of currency: bills, credit cards, checks, etc.
What are the benefits of credit sales? ›
Credit sales may incentivize customers to buy more goods, as they do not need as much cash on hand to make a purchase. On the other hand, credit sales stretch the cash reserves of the seller, as there is a period of time when they will not have received cash.
What are the disadvantages of credit sales? ›
Of course, there are also potential drawbacks to offering credit sales. Granting credit sales exposes you to a higher risk of bad debts than requiring immediate payment. When a company sells on credit, it forgoes part of its cash flow until the customer makes payment.
What is the process of credit sales? ›
Credit sales are sales that the payout is done after delivery of goods with period of time agreed upon by both parties. In transaksipenjualan loans, if orders from customers has been fulfilled with the delivery of goods or services, for a period of time the company has accounts receivable on its customers.
What are three main types of sales credit? ›
For anyone working toward achieving better financial health, it's essential to understand the three main types of credit — installment credit, revolving credit, and open credit — and the ways they impact your credit score.
Other types of sale: cash and advance payment
These are largely self-explanatory terms, with cash sales being fulfilled in one lump-sum payment at the time of purchase and advance payments effectively working in reverse to credit sales, with money being supplied before the goods.
Who bears the risk of receivable in a credit sale? ›
When a business offers credit to its customers, it assumes accounts receivable risk. If a customer fails to pay a bill on time, the business may not be able to recover that money.
Does credit sales mean revenue? ›
What is Credit Sales? Credit Sales refer to the revenue earned by a company from its products or services, where the customer paid using credit rather than cash.
What are the three golden rules of accounting? ›
The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out. These rules are the basis of double-entry accounting, first attributed to Luca Pacioli.
Is credit sales an asset or liability? ›
For a business, credit sales are an asset because they have made money even if they have not yet received it. This is termed as “accrued income" which is an asset. While for a debtor or buyer, credit sales become a liability since he has a debt.
Where do you put credit sales on a balance sheet? ›
Because companies don't receive payments from credit sales for many weeks or even months, credit sales appear as accounts receivables, a component of short-term assets on the balance sheet.As previously stated, you need to debit the company's receivables account and credit the sales revenue account in order to record ...
Is a credit sale a loan? ›
Meaning of credit sale in English
a sale of a product in which the buyer uses credit (= takes the product immediately but pays in the future): credit sale agreement/contract A credit sale agreement is essentially a loan for the purchase price of the item with the money being paid over a fixed period of time.
Does credit mean buy or sell? ›
The borrower borrows money from the lendor. The borrower pays back the money at a later date along with interest. Most people still think of credit as an agreement to buy something or get a service with the promise to pay for it later. This is what is referred to as a purchase on credit.
Is credit sales the same as total sales? ›
In other words, net credit sales are the revenues your business generates on account of selling goods to customers on credit. This means that net credit sales do not include any sales made on cash. Furthermore, net credit sales also take into account sales return and sales allowances.
