# Credit Sales – Definition, Calculation, Examples and Tips

## Definition of Credit Sales

The term “credit sales” refers to a transfer of ownership of goods and services to a customer in which the amount owed will be paid at a later date. In other words, credit sales are those purchases made by the customers who do not render payment in full at the time of purchase.

## Types of Sale Transactions

Basically, there are three types of sales transactions- cash sales, credit sales, and advance payment sales. The variation between these sales transactions simply lies in the timing of when cash is received.

• Cash sales – Cash is collected when the sale is made, and the goods or services are delivered to the customer. Here the consideration for sale is settled in cash or cash equivalent by the buyer.

• Credit sales - Here, the consideration is for sale is settled on a later date. The seller provides the credit period to pay the bill on the later date.

• Sales against advance payments – Here, customer’s pay the seller in advance before the sale is made. Generally, the advance payment is a partial amount of full consideration and sometimes, it could be full consideration as well.

## Credit sales and Credit Term

It is customary for credit sales to include credit terms. A credit term indicates payment due date for sales made on credit, possible discounts, and interest or late payment fees if any.

Let’s consider a credit term for a credit sale of 2/10, net 30.

Here, net 30 refers to the maximum credit days in which the buyer needs to pay the bill.  2/10 implies that if the customer pays within 10 days, a 2% discount will be applied.

To make it easier, let’s consider another credit sale example.

Priya Enterprises sold goods worth Rs.10,000 /- Max Ltd. Priya Enterprises offered a credit term of 5/10, net 30.

If Max Ltd pays the amount owed (Rs.10000 /-) within 10 days, 5% discounted will be allowed. Therefore, the amount that Max Ltd would need to pay for his purchases would be Rs. 9,500. Else, they need to pay the complete amount of 10,000.

Is it beneficial to pay early to avail the discount? Figure out by reading Cost of Accounts Payable

## How to Account Credit Sales?

Let’s consider a credit sales example of Prime Enterprises.

On 1st December, 2019, Prime Enterprises sold computers and laptops to Max Ltd for 1,00,000/- on credit. The due date to pay the bill is on 31st December,2019. On January 30, 2018, Max Ltd made the full payment of Rs.1,00,000 /- in cheque.

Accounting Entries for Credit Sales

(Dr)Max Ltd A/c………….     Dr.   1,00,000

(Cr)To computer sales A/c.                         1,00,000

Accounting Entries for Receiving Payment

(Dr) Bank A/c             Dr 1,00,000

(Cr) To Max Ltd A/c              1,00,0000

## How to Manage Credit Sales efficiently?

Successful closure of credit sale is determined only when you convert your ‘sales into cash’. Till your sales are converted into your cash, you need to manage ‘how much you need to ‘receive?’ from whom? And when?

This is critical for business because the credit sales are nothing but the money which is yet to be enchased from your customers and it is referred to as accounts receivables.

Accounts receivables are one of the key sources of cash inflow, any inefficiency in managing accounts receivables will impact your business in several ways and potentially hamper the growth of the business.

Here are 4 Tips for increasing efficiency in managing bills receivable and reducing your order to cash cycle.

• Bill-by-bill Receivable Management

Here, bill-by-bill refers to the tracking of each sales invoice and mapping with the subsequent receipts received from the customer. Thus, at any point, you can easily track the bills pending instead of just knowing only the overall outstanding of a customer

• Ageing analysis

The longer an invoice sits as accounts receivable, will lead to cash flow issues, and at some point in time it may turn into bad debt. Thus, it is important for you to be top of the ageing of each bill. This helps in identifying the bills which are pending from long-time and ones that require immediate action

• Payment Performance and periodically following up

Payment Performance of customers’ is the average time the customers take to actually pay their bills irrespective of the outstanding balance on the statement date. This is also known as receivable turnover in days. This helps in identifying the customers with a poor track record and accordingly action.

• Internal Credit Control Techniques

To ensure better credit management, you can define maximum Credit Limit based on the credibility, the volume of transactions, the capacity of repayment, etc. for your customers. This will help business owners in overselling a customer beyond the defined credit limit.

While this sounds true, automating the accounts receivables process using accounting software will be key for businesses. Accounting software helps in ease of managing the receivables, easy to track the pending invoices and real-time status of receivables and aging of bills.

Find out How TallyPrime can help you record credit sales and track complete accounts receivables.

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