Definition
Credit Sale refers to a sale in which payment is deferred beyond the transaction date, establishing an account receivable. This agreement allows customers to purchase goods or services with the promise to pay for them on a later date. Credit sales are recorded as assets on the balance sheet until the payment is received, which can affect a company’s revenue recognition and cash flows.
Examples
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Retail Store Purchases: A customer buys a $1,000 laptop from an electronics store and agrees to pay the amount within 30 days. The store records a credit sale of $1,000.
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Wholesale Transactions: A wholesaler sells $5,000 worth of clothing to a retailer on credit, to be paid 60 days from the invoice date. The wholesaler records this transaction as a credit sale, increasing accounts receivable by $5,000.
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Service Agreement: A consulting firm provides $10,000 worth of services to a client, billing them with a repayment term of 45 days. The firm logs this as a credit sale in their accounting records.
Frequently Asked Questions (FAQs)
What is the impact of credit sales on cash flow?
Credit sales can initially reduce cash flow since the revenue is recognized before cash is received. Companies rely on their accounts receivable management practices to convert these into actual cash flow.
How are credit sales recorded in accounting?
Credit sales are recorded by debiting accounts receivable and crediting the sales revenue. When payment is received, accounts receivable is credited, and cash is debited.
What are the risks associated with credit sales?
Risks include potential non-payment or delayed payments, which can impact a company’s liquidity and financial health. A high volume of outstanding receivables can lead to cash flow issues.
How do you manage the risks of credit sales?
Companies often implement credit policies, conduct credit assessments for new customers, set credit limits, and follow up on overdue accounts to manage the risks associated with credit sales.
How is a credit sale different from a cash sale?
In a credit sale, payment is delayed to a future date, whereas a cash sale involves immediate payment at the time of transaction. Credit sales generate accounts receivable, while cash sales affect cash accounts directly.
Related Terms
- Accounts Receivable: Money owed to a company by its debtors for goods or services sold on credit.
- Revenue Recognition: The accounting principle dictating the conditions under which revenue is recognized.
- Debtor: An entity or person that owes money to another party.
- Sales Revenue: The income from sales of goods or services to customers.
- Credit Terms: The conditions under which credit is extended to a customer, including the payment period and any discounts for early payment.
Online References
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren
- “Principles of Accounting” by Belverd E. Needles, Marian Powers
- “Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso
Accounting Basics: “Credit Sale” Fundamentals Quiz
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