Customer purchases to be paid at a later date
Over 2 million + professionals use CFI to learn accounting, financial analysis, modeling and more. Unlock the essentials of corporate finance with our free resources and get an exclusive sneak peek at the first module of each course. Start Free
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
A credit sale is a transaction in which a customer purchases goods but defers payment to a later date—for instance, by using a credit card. Before the exchange of goods, the credit terms are clearly defined, outlining when the total amount is due and the method of payment.
What is a credit sale example? ›
Credit sales allow customers, especially business customers, to generate cash on the commodity before paying the seller. An example is when you buy a car on credit and use it for Uber and then pay back using the proceeds from Uber driving.
What is a credit sales job? ›
Credit sales is selling goods or services to customers on credit, letting them purchase and make payment at a later date. The buyer gets a product or service immediately in a credit sales transaction and will pay later.
Are 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 another name for credit sales? ›
Credit sales are also known as sales made on account.
How does a credit sales work? ›
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.
What is the purpose of a credit sale? ›
Advantages and disadvantages of credit sales
Credit sales often prove useful for those in need of high-value goods that they cannot gather the money to pay for upfront. They can also be a good way for businesses to draw in new customers that may otherwise be put off by financial restrictions.
Is credit sales good or bad? ›
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.
How do you pass credit sales entry? ›
Ans: The credit sales journal entry should debit your Accounts Receivable, which is the amount the customer has charged to their credit. And, you will credit your Sales Tax Payable and Revenue accounts.
Is a credit sale income? ›
Credit Sales refer to the revenue earned by a company from its products or services, where the customer paid using credit rather than cash. The gross credit sales metric neglects any reductions from customer returns, discounts, and allowances, whereas net credit sales adjust for all of those factors.
Credit sales = Closing debtors + Receipts - Opening debtors.
What is the double entry for credit sales? ›
What is the double entry for credit sales? Double-entry bookkeeping tracks credit sales. The debit value in a company's accounts must equal the value of the credits. In addition, one must keep track of five types of accounts when doing double-entry bookkeeping.
What is the basis for credit sales? ›
BASIS FOR CREDIT SALES. Credit can be granted based on the following The income of the buyer Sources of payment Integrity of the buyer Availability of guarantors Present employment Time of payment.
What best describes credit sales? ›
Answer and Explanation: C) Sales to customers on account best describes credit sales. The extension of credit using invoices is recorded in a company's accounts receivable.
What is the commission given on credit sales called? ›
To increase the sale and to encourage the consignee to make credit sales, the consignor provides an additional commission generally known as del-credere commission.
Who is a credit sales officer? ›
A credit officer processes financial loan applications for clients on behalf of banks. Their job responsibilities include helping clients choose the best loan options for their car, mortgage, or personal credit. Other duties include evaluating credit, entering financial data, and performing risk assessments.
What is credit sales an example of? ›
The term “credit sales” refers to a transfer of ownership of goods and services to a customer in which the amount owed will be paid at a later date. In other words, credit sales are those purchases made by the customers who do not render payment in full at the time of purchase.
What is the legal definition of a credit sale? ›
(h) The term “credit sale” refers to any sale in which the seller is a creditor.
What is the difference between a credit sale and an installment loan? ›
Installment sales and credit sales are types of credit arrangements that defer payments for goods to a later date. The two key differences between installment and credits sales are the duration the credit is offered and the collateral used to back the credit.
What are three main types of sales credit? ›
Generally speaking, there are three different types of credit: revolving credit, open credit, and installment credit.
