Most people will have come across credit sales in their personal lives if not in a business capacity. These are often referred to as buying “on finance” and involve a customer agreeing to repay the price of a good they’ve acquired over an extended period. This often includes paying interest for the length of time taken to repay the full amount owed – although many companies will offer interest-free periods, particularly at the beginning of the agreement. Although the total amount is not paid upfront, the customer still becomes the legal owner of the goods in question as soon as the agreement is made.
Find out everything you need to know about credit sales in accounting, as well as the advantages and disadvantages of credit sales, right here.
Credit sales in accounting
It’s vital that credit sales are accurately recorded in your company books so that you stay on top of any money owed as well as any assets disposed of. How your sale is recorded will depend on the nature of the credit repayment as well as whether there is any interest payable or applicable discounts (such as an early-payment discount) to be applied. It will appear as a double entry in your bookkeeping, with debit and credit needing to be accounted for as well as receivables and revenue.
Other types of sale: cash and advance payment
When discussing credit sales, it’s essential to understand the other types of sale and the ways in which they compare. Typically, alongside credit sales, you will also come across cash sales and advance payment. These are largely self-explanatory terms, with cash sales being fulfilled in one lump-sum payment at the time of purchase and advance payments effectively working in reverse to credit sales, with money being supplied before the goods.
Advantages and disadvantages of credit sales
Credit sales often prove useful for those in need of high-value goods that they cannot gather the money to pay for upfront. They can also be a good way for businesses to draw in new customers that may otherwise be put off by financial restrictions.
However, as mentioned, the customer becomes the legal owner of goods exchanged in a credit sale as soon as the agreement is fixed. This means that the seller does not have any right to repossess the goods if any payments are missed. While the seller can, of course, pursue court action against the customer for money owed, this is often considered a more demanding route to cost recovery and can represent a significant risk to the seller.
Both parties also need to consider the interest rate, particularly the customer. Credit sales can sometimes involve customers paying significantly more than the value of the goods themselves because of the accrual of interest over time. While this is regulated by statutory bodies, it’s still important to understand the terms in each individual transaction and what that could mean for long-term costs. Some credit sales also include a balloon payment at the end of the agreement.
These interest terms can, conversely, represent an advantage to sellers, who may be able to charge more for products where the cost is spread over time and may also profit from ongoing interest payments.
What are some common examples of credit sales?
Credit sales are often seen in everyday life, with large-value purchases such as cars and sofas often involving some form of credit sale. They’re also becoming increasingly common among lower-value items, with many fashion sites now utilising credit sales and offering weekly payments as an alternative to paying for items upfront.
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