Liabilities, equity, and revenue are increased by credits and decreased by debits. Because Accounts Receivable are considered current assets, it’s good to know how much potential income the receivables are worth. It is also a good way to determine the ratio of cash-to-credit customers.

There are several advantages and disadvantages for a company offering credit sales to customers. When companies extend credit to a customer, it carries a certain time period in which the invoice or amount of sale is due, e.g., 30 days. The company may also offer a discount if payment is made within a shorter period of time, e.g., 10 days. Another might be a business that is required to pay rent quarterly. This transaction balances because both asset flows come to a sum of $0, and there are $0 transactions on the liabilities and equity side. In the case of credit sales, the respective “debtor’s account” is debited, whereas “sales account” is credited with the equal amount. A sales journal entry is the same as a revenue journal entry.

Accounting for credit sales

Companies are careful when extending credit to customers since a failure to pay the amount owed adds to the company’s bad debt. Bad debt refers to all amounts owed to the company by its clients which are considered irrecoverable. Unfortunately, companies who sell on credit often find that they don’t receive payments from customers on time. In fact, one study found that if the credit term is net 30 days, the money, on average, arrived 45 days after the invoice date. In order to speed up these payments, some companies give credit terms that offer a discount to those customers who pay within a shorter period of time.

For the credit sale, the client pays for the good or service after some time; this is usually in a period of not more than 30 days. Businesses specify in the terms of credit sales when customers must make their cash payments. The https://www.bookstime.com/ terms may also allow customers to make early cash payments for a discount. To record regular, on-time cash collections, businesses debit the cash account and credit accounts receivable to remove collected customer accounts.

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Companies are careful while extending credit as it may lead tobad debts for the business. Higher credit sales affect the how to record a credit sale company’s liquidity as creditors block most of the funds. Managing it is one of the biggest concerns of the seller.

Gem Merchandise Co. ships $1,000 of goods and the customer returns $100 of unacceptable goods to Gem within a few days. At that point, the net amount owed by the customer is $900. If the customer pays Gem within 10 days of the invoice date, the customer is allowed to deduct $18 (2% of $900) from the net purchase of $900.