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.
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.
