Credit Sales

Examples of Credit Sales in the following topics:

• Using the Receivables Turnover Ratio

  • The receivables turnover ratio, also called the debtor's turnover ratio, is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts.
  • A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient; in contrast, a low ratio implies the company is not making the timely collection of credit.
  • Sometimes the receivables turnover ratio is expressed as the "days' sales in receivables":
  • $\dfrac{\text{Trade receivables}}{\text{Credit sales} \cdot 365} = \text{Average collection period in days}$
  • $\dfrac{\text{Trade payables}}{\text{Credit purchases} \cdot 365} = \text{Average payment period in days}$

• Days Sales Outstanding

  • The days sales outstanding figure is an index of the relationship between outstanding receivables and credit account sales achieved over a given period.
  • A low ratio may indicate the firm's credit policy is too rigorous, which may be hampering sales.
  • Higher days sales outstanding can also be an indication of inadequate analysis of applicants for open account credit terms.
  • If DSO is getting longer, customers are taking longer to pay their bills, which may be a warning that customers are dissatisfied with the company's product or service, or that sales are being made to customers that are less credit worthy or that sales people have to offer longer payment terms in order to generate sales.
  • Many financial reports will state Receivables Turnover defined as Net Credit Account Sales / Trade Receivables; divide this value into the time period in days to get DSO.

• Recording Sales

  • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.
  • Sales - Sales Return & Allowances - Sales Discount = Net sales
  • A sale is a transfer of property for money or credit.
  • In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account.
  • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.

• Recognition of Revenue at Point of Sale or Delivery

  • Companies can recognize revenue at point of sale if it is also the date of delivery or if the buyer takes immediate ownership of the goods.
  • Since most sales are made using credit rather than cash, the revenue on the sale is still recognized if collection of payment is reasonably assured.
  • The accrual journal entry to record the sale involves a debit to the accounts receivable account and a credit to the sales revenue account; if the sale is for cash, the cash account would be debited instead.
  • The revenue earned will be reported as part of sales revenue in the income statement for the current accounting period .
  • When the transfer of ownership of goods sold is not immediate and delivery of the goods is required, the shipping terms of the sale dictate when revenue is recognized.

• Accounting for Sale of Stock

  • How the stock sale is accounted for depends on the type of stock sold.
  • Most stock sales involve common stock or preferred stock.
  • Credit additonal paid in capital (to account for the difference between par value and sell value)
  • Credit additional paid in capital (the difference between sale price and purchase price)
  • Most stock sales involve common stock or preferred stock.

• Types of Transactions

  • A sale is a transfer of property for money or credit.
  • In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account.
  • Fees for services are recorded separately from sales of merchandise, but the bookkeeping transactions for recording sales of services are similar to those for recording sales of tangible goods .
  • Purchases can be made by cash or credit.
  • As credit purchases are made, accounts payable will increase.

• Sales Forecast Input

  • For financial ratios that use income statement sales values, "sales" refers to net sales, not gross sales.
  • A sale is a transfer of property for money or credit.
  • In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account.
  • Gross sales are the sum of all sales during a time period.
  • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.

• Setting a Credit Policy

  • To establish a credit policy, a company must establish credit standards, credit terms, and a collection policy.
  • Management must decide on credit standards, which involves decisions on how much credit risk to assume.
  • A restrictive policy will most likely result in lower sales, but the firm will have a smaller investment in receivables and incur less bad-debt losses.
  • Another important factor in determining credit standards involves a company evaluating the credit worthiness, or credit score, of an individual or business.
  • There are many purposes for discounting, such as to move out-of-date stock, to reward valuable customers, as a sales promotion, or to reward behaviors that benefit the discount issuer.

• Sale

  • The disposal sale of an asset is similar to a regular asset sale, where cash proceeds are received and a loss or gain may be realized.
  • The sale of an asset for disposal purposes is similar to a regular asset sale.
  • A journal entry is recorded to increase (debit) depreciation expense and increase (credit) accumulated depreciation.
  • Depending on whether a loss or gain on disposal was realized, a loss on disposal is debited or a gain on disposal is credited.
  • The entry to remove the asset and its contra account off the balance sheet involves decreasing (crediting) the asset's account by its cost and decreasing (crediting) the accumulated depreciation account by its account balance.

• Credit Cards

  • Credit cards are issued by an issuer like a bank or credit union after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card.
  • As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy.
  • Merchants are charged several fees for accepting credit cards.
  • Merchants may charge users a "credit card supplement," either a fixed amount or a percentage, for payment by credit card.
  • Merchants are also required to lease processing terminals, meaning merchants with low sales volumes may have to commit to long lease terms.