What is Credit Sales?
Credit Sales refer to sales in which customer or purchaser is allowed to make payment at a later date instead of making payment at the time of purchase. In this type of sales, the customer is getting adequate time for making payment.
There are mainly three types of sales transactions are happening which are as below:
- Cash Sales – Cash sales refer to sales in which customer is making payment at the time of purchase.
- Credit Sales – It refer to sales in which customer is making payment at a later date.
- Advance Payment Sales – Sales in which customer has to make payment before sales.
Terms Related to Credit Sales
Below are the terms that are used in credit sales
- Credit Limit – Credit limit is the maximum amount up to which the company can sell his material to a particular customer as credit sales.
- Credit Period – Credit period refers no. of days under which the customer has to make payment to the seller or when payment will be due for credit sales.
Credit Sales Journal Entry
Below is the journal entry for recording it in the books of account.
Examples of Credit Sales Journal Entry
The following are credit sales journal entry examples of this concept to understand it better.
Walter is a dealer of mobile phones and he is selling goods to Smith on 01.01.2018 of $ 5000 on credit and his credit period is 30 days which means Smith has to make the payment on or before 30.01.2018.
Below are the Credit Sales Journal entries in the books of Walter.
Sometimes the Company gives a cash discount or an early payment discount. Assume in the above example Walter is giving a 10% discount if smith makes the payment on or before 10.01.2018 and smith makes his payment on 10.01.2018.
Below are the credit sales Journal entries in the books of Walter.
Assume in the above example john is not able to make payment by 30.01.2018 and he got bankrupt and Walter believes that now outstanding is unrecoverable and it is bed debt now.
Below are the Journal entries in the books of Walter:
At the end of the financial year, Walter will pass entry for bed debt.
Below are the advantages of credit sales
- Credit sales with good credit policies give competitive advantages to the organization.
- Such policies helps newly set up organizations in increasing sales.
- It develops trust and relation between customer and company.
- It helps those customers who do not have enough cash to make payment at the time of purchases and they can make payment after 15 days or 30 days as per the credit term.
- Longer credit days can attract new customers.
Below are the disadvantages of credit sales –
- In credit sales, there is always a risk of bad debt.
- It affects the cash flow of the company because payment will receive at a later stage.
- Company has to incur expenses on collection agency for regular follow up with customer for their outstanding.
- The company has to maintain separate books of accounts for accounts receivable.
- In credit sales, there is a notional loss of interest during the credit period because money is getting blocked.
How to Show Credit Sales in the P&L and Balance Sheet of Seller?
- Credit Sales – Credit sales will show in the credit side of profit & loss a/c.
- Debtors – Debtors will show in assets side of the balance sheet under current assets if there is any outstanding as on balance sheet date.
- Cash Discount – Cash Discount will show the debit side of Profit & loss a/c.
- Bad Debt – Bad debt will show a debit side of profit & loss a/c and the same amount will reduce from debtors in the balance sheet.
What is Del credere Agent?
Companies are appointing Del credere agency as protection from bad debt. Now we will understand what Del credere agency is and what they are doing. Del credere agent works as an agent as well as a guarantor for the company. Del credere agent will become liable to pay to the principle when a customer will not make the payment to the company and become defaulter for this Del credere agent takes a certain amount as a commission at the time of sales only.
This arrangement saves the company from making a huge loss because of bad debt.
It is a type of sales in which companies are selling goods to the customer on credit on this basis of the credibility of customers. It gives time to the customer that they can make the payment after selling the purchased goods and do not require to invest own money into a business. It helps small businesses, especially who does not enough capital at the same it helps big companies also because it attracts customer.
In credit sales always there is a risk of bad debt it means if a customer is not able to make payment or fraud or not traceable then in that situation it is very difficult to get money and become bed debt. It increases the cost of capital also because customer giving payment after 15 days or 30 days depends on their credit terms it means companies capital get blocked for these days and there is loss of interest. So it is a very good option for new companies as well as it is a costly affair.
This has been a guide to what is Credit Sales?. Here we discuss the most common examples of a journal entry of credit sales along with explanations, advantages, and disadvantages. You can learn more about accounting from the following articles –