Credit Sales

Customer purchases to be paid at

a later date

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What are Credit Sales?

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. To learn more, check out CFI’s
Credit Analyst Certi!cation program.

Types of Sales Transactions

There are three main types of sales
transactions: cash sales, credit sales, and
advance payment sales. The di"erence
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 o"ers 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 e"ect 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 o"ering credit sales to customers.

Advantages
Credit sales can be used to more easily
acquire new customers. O"ering credit
can attract new customers to purchase
from the company.
Customers are sometimes without
enough cash on hand. O"ering credit
gives customers the #exibility 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 o".
Costs of collection may decrease
revenue. If a customer misses the
payment or refuses to pay, the
company may incur collection costs in
trying to obtain the payment.

More Reading
CFI is the o$cial provider of the online
Certi!ed Banking & Credit Analyst (CBCA)™
program, designed to help anyone become a
world-class credit analyst. To develop your
career in corporate !nance, these additional
CFI resources will be helpful:

Trade Credit
Sale and Purchase Agreement
Projecting Income Statement Line
Items
Allowance for Doubtful Accounts

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