Credit Sales

Examples of Credit Sales in the following topics:

• 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.

• Calculating the Cash Flow Cycle

  • Accounts Receivable / (Credit Sales / 365)
  • The receivables conversion period (or "Days sales outstanding") emerges as interval B→D (i.e., being owed cash→collecting cash)
  • Receivables conversion period: Rate = revenue, since this is the item that can grow receivables (sales).
  • Our aim of studying cash conversion cycle and its calculation is to change the policies relating to credit purchase and credit sales.
  • If it tells good cash liquidity position, we can maintain our past credit policies.

• 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.

• Short-Term Approach

  • This measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales.
  • The aim of the study and calculation of the cash conversion cycle is to change the policies relating to credit purchase and credit sales.
  • A firm can change its standards for payment on credit purchases and getting payment from debtors on the basis of cash conversion cycle.
  • If the firm is in an effective cash liquidity position, it can maintain its past credit policies.

• 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.

• Defining Accounts Receivable

  • Accounts receivable represents money owed by entities to the firm on the sale of products or services on credit.
  • Accounts receivable represents money owed by entities to the firm on the sale of products or services on credit.
  • In turn, the customer must pay the invoice within an established timeframe, which is called the credit terms or payment terms.
  • The accounts receivable departments use the sales ledger, which normally records:
  • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

• Treasury Stock

  • When the treasury stock is sold back on the open market, the treasury stock account is reduced (credited) for the original cost and the difference between original cost and sales price is debited or credited to a treasury stock paid in capital account, which is also disclosed in the equity section of the balance sheet.
  • Cash is debited for the proceeds of the sale.
  • Cash is also credited for the purchase price.
  • When the stock is resold, treasury stock is credited for the par value of the stock sold.
  • Differences between the sales price and repurchase price are debited or credited to paid in capital, along with a debit to cash for proceeds from the sale.

• Collecting Receivables

  • The accounts receivable days is the average number of days that it takes a firm to collect on its sales.
  • Seasonal sales patterns may cause accounts receivable days to change depending on when the calculation occurs.
  • Payment patterns provide information on the percentage of monthly sales that the firm collects each month after the sale.
  • Another way to evaluate a credit policy is to look at the receivable turnover ratio.
  • A company may protect against bad-debts losses by purchasing trade credit insurance.

• Reporting Investing Activities

  • An investing activity is anything that has to do with changes in non-current assets -- including property and equipment, and investment of cash into shares of stock, foreign currency, or government bonds -- and return on investment -- including dividends from investment in other entities and gains from sale of non-current assets.
  • In each of these cases, the Cash account would be debited -- due to the increase in cash -- and the account appropriate to the specific investment would be credited -- which could include Operating Assets, Equity Investments, or Debt Investments.
  • In each of these cases, the account appropriate to the specific investment would be debited, and the Cash account would be credited, due to the decrease in cash.
  • The sale of a factory would be an example of a cash inflow from investment.

• 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.