Credit Sales Journal Entry

Sale is the business transaction between seller and buyer. Seller provides goods or services while customers consume and make payments.  It determines the amount of goods services that seller agrees to exchange with a specific amount of cash or other assets. Both parties must agree on the sale quantity, price, delivery method, and credit term.

The seller expects to receive the payment after delivering goods or services. If the buyer makes payment immediately, it is considered a cash sale. If the buyer delay payment, it is considered a credit sale. Most of the companies wish to receive the cash immediately after the sale. It will allow them to use the cash to pay for employees, creditors, and other parties. Cash sale will eliminate the risk of the uncollectible account which is the seller expense. However, they allow the credit sale to compete with other competitors who are doing the same thing.

Credit Sale is the sale transaction that we allow the customers to receive goods or services first and pay us later. In order to increase the sale volume, company allows the buyers to buy on credit. The seller allows the customers to consume the products first and make payments later.

The company makes credit sale to the consumers based on the credit term. Company access the consumers’ ability to pay back before providing the credit sale. They wish to receive the cashback and prevent the uncollectible accounts receivable. The credit term also includes the time when the payment is due after the sale, the discount, and interest on late payment. The sellers will provide cash discounts to encourage the customers to make payments early. They will punish the customer who pays late by charging interest over the credit amount.

Credit Sales Journal Entry

When the company delivers the goods or services to the customers, they need to record sales revenue. As the payment is not yet received, company needs to record the accounts receivable as well.

The journal entry is debiting accounts receivable and credit sale revenue.

The accounts receivable will be present on the balance sheet as the current assets. Sale revenue will be recorded in the income statement.

When the cash is collected based on the credit term, company needs to record cash and reverse the accounts receivable.

The journal entry is debiting cash and credit accounts receivable.

Cash will increase after the customers make payments. The accounts receivable will decrease from the balance sheet.

Note: this article will not talk about recording the cost of goods sold. There will be another article to discuss this journal entry.

Credit Sales Journal Entry Example

On 1^st November, company ABC sold the raw material of $ 100,000 to XYZ. Base on the long-term relationship, ABC provide the credit term of 1 month to XYZ. It means they need to make payment in November otherwise there will a penalty of 1% per month.

On 15^th November, XYZ makes a payment of $ 100,000 to settle the whole amount. Please prepare the journal entry related to this sale.

On 1^st November, ABC sale goods to customers by allowing them to pay later. It is considered a credit sale.

The journal entry is debiting accounts receivable $ 100,000 and credit sale revenue $ 100,000.

It will increase the accounts receivable by $ 100,000 on balance sheet. The income statement will increase the revenue by $ 100,000.

On the 15^th, ABC receive a cash payment from the customers, so accountant needs to reverse the accounts receivable and recognized cash.

The journal entry is debiting cash $ 100,000 and credit accounts receivable $ 100,000.

Accounts receivable will decrease by $ 100,000 as the customer already paid. Cash increase by $ 100,000 on the company balance sheet.

Advantage of Credit Sale

• Attract Big customers: The credit sale will attract the big customer who is also the business entity. Most companies want to manage their cash flow very carefully. So when suppliers allow the credit sale, it will attract them to buy from that suppliers.
• Improve the relationship between buyer and seller: The credit sale will improve the relationship between both parties. It shows that seller trust the buyers by allowing them to purchase on credit.
• Attract New Customers: The customers will move from the other suppliers due to the credit term.
• Increase Sale: Without credit terms, we will eliminate some sales as the customers may not have enough cash at the moment.