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Credit Sales

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Credit Sales Meaning

Credit Sales refer to sales in which the customer or purchaser is allowed to make payment later instead of at the purchase time. In this sale, the customer gets adequate time to make payment.

Key Takeaways

  • Credit sales mean sales in which the customer or purchaser can make payment later rather than at the purchase time. In this sale, the customer has sufficient time to make the payment.
  • Credit limit and credit period are the terms related to credit sales.
  • In these sales, there is always a bad debt risk. If a customer cannot pay, do fraud, or is untraceable, it may be challenging to obtain money. As a result, it will become a bad debt and increase the cost of capital if customers pay after 15 days or 30 days, based on the credit terms.

Credit Sales Explained

Credit sales are a type of sales in which companies sell goods to the customer on credit based on the credibility of customers. It gives the customer time to make the payment after selling the purchased goods and does not require them to invest their own money into a business. It helps small businesses, especially those that do not have enough capital. At the same, it helps big companies also because it attracts customers.

In credit sales, there is always a risk of bad debt. If a customer cannot make a payment, commits fraud, or is not traceable, it will be challenging to get money. It will become a bad debt in that situation. It can also increase the cost of capitalCost Of CapitalThe cost of capital formula calculates the weighted average costs of raising funds from the debt and equity holders and is the total of three separate calculations – weightage of debt multiplied by the cost of debt, weightage of preference shares multiplied by the cost of preference shares, and weightage of equity multiplied by the cost of equity.read more cost if customers pay after 15 days or 30 days, depending on their credit terms. In such a scenario, a company’s capital gets blocked, and interest is lost. So, it is an excellent yet costly option for new companies.

Below is the journal entry for recording credit sales in the books of account:

Credit Sales Example 4

Examples of Credit Sales

The following are credit sales journal entry examples to understand the concept better:

Example #1

Walter is a dealer of mobile phones, and he is selling goods to Smith on January 1, 2018, for $5,000 on credit; his credit period is 30 days, which means Smith has to make the payment on or before January 30, 2018.

Below are the journal entries in their books of Walter:

Credit Sales Example 1
Example 1.1

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Example #2

Usually, a company gives a cash discount or an early payment discount. In the above example, Walter is offering a 10% discount if Smith makes the payment on or before January 10, 2018. Accordingly, Smith made his payment on January 10, 2018.

Below are the journal entries in their books of Walter.

Example 2
Credit Sales Example 2.1

Example #3

Let’s assume in the above example that Smith cannot make payment by January 30, 2018, as he has gone bankrupt. Now, Walter believes that the outstanding amount is unrecoverable and is bad debtBad DebtBad debt expense is an expense recorded in financial statements when the amount receivable from debtors is unrecoverable owing to the debtors' inability to meet their financial obligations and can be calculated using the direct method of allowance/estimation method.read more now.

Below are the journal entries in their books of Walter:

Example 3

Walter will pass entry for the bad debt at the end of the financial year:

Credit Sales Example 3.1

Advantages

Disadvantages

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

Frequently Asked Questions (FAQs)

How are credit sales recorded?

Credit sales are recorded on the company’s income statement and the balance sheet. On the income statement, one must register the sale as a rise in sales revenue, cost of goods sold, and expenses.

What is the percentage of credit sales method?

The percentage of credit sales method determines the uncollectible debts by predicting the probability of not collecting delinquent accounts. It estimates the expenses such as bad debt or uncollectible costs depending on the net credit sales percentage.

What are credit sales on an income statement?

For calculating credit sales, one must analyze the cash received. After obtaining the figures, they must know credit sales by reducing total sales by the total money received.

Is credit sales the same as accounts receivable?

Accounts Receivable (AR) shows the business credit sales which still need to be collected from the customers. In comparison, Credit sales are also known as sales made on the account.

It has been a guide to what credit sales are and their meaning. Here we explain how to record credit sales in the Balance Sheet along with examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

Reader Interactions

Comments

  1. Gift kunda says

    So much educative

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