Credit Sales

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 refers 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

  • 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.

A Credit Sales Journal Entry

Below is the journal entry for recording it in the books of account.

Credit Sales Example 4

Examples

The following are credit sales journal entry examples of this concept to understand it better.

Example #1

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 Journal entries in the books of Walter.

Credit Sales Example 1

Example 1.1

Example #2

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 Journal entries in the books of Walter.

Example 2

Credit Sales Example 2.1

Example #3

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:

Example 3

At the end of the financial year, Walter will pass entry for bed debt.

Credit Sales Example 3.1

Advantages

Disadvantages

How to Show Credit Sales in the P&L and Balance Sheet of Seller?

  • Credit Sales – It will show in the credit side of profit & loss a/c.
  • DebtorsDebtors will show in assets side of the balance sheet under current assets if there is any outstanding as on balance sheet date.
  • Cash DiscountCash 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.

Conclusion

Credit Sales 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 their own money into a business. It helps small businesses, especially those who do not have enough capital; at the same, it helps big companies also because it attracts the customer.

In credit sales, there is always 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 customers giving payment after 15 days or 30 days depends on their credit terms. In such a scenario company’s capital gets blocked for these days, and there is a loss of interest. So it is a very good option for new companies as well as it is a costly affair.

Recommended Articles

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 –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *