Credit sales definition
/What are Credit Sales?
Credit sales are purchases made by customers for which payment is delayed. Delayed payments allow customers to generate cash with the purchased goods, which is then used to pay back the seller. Thus, a reasonable payment delay allows customers to make additional purchases. The use of credit sales is a key competitive tool in some industries, where longer payment terms can be used to attract additional customers.
A downside of credit sales is the risk of bad debt loss. Also, the seller must invest in a credit and collections department.
Examples of Credit Sales
Here are several examples of credit sales within different industries:
Retail store. A customer purchases $200 worth of clothing using a store-branded credit card, agreeing to pay the balance in monthly installments.
Wholesaler. A restaurant purchases $10,000 worth of ingredients from a food supplier with a payment term of "Net 30" (payment due within 30 days).
Services provider. A client receives legal services amounting to $15,000 and is billed at the end of the month with payment due in 45 days.
E-commerce. A customer buys $300 worth of products online and selects "Buy Now, Pay Later" as the payment method, agreeing to pay the amount in four installments over the next two months.
Subscription provider. A company subscribes to a $2,000 annual software plan and receives an invoice for payment due within 30 days instead of paying upfront.
Accounting for Credit Sales
When a seller records a credit sale, the related journal entry contains a debit to the trade receivables account, and a credit to the relevant sales account. When a customer later pays the amount stated on a billing, this results in a debit to the cash account and a credit to the trade receivables account (thereby eliminating the balance in the trade receivables account).
Terms Similar to Credit Sales
Credit sales are also known as sales made on account.