Credit sales are sales in which the customer promises to pay the seller at a later date for the goods or services that have been provided. This form of transaction is common in business-to-business (B2B) transactions where immediate payment is not always feasible or customary.
Instead of paying at the time of purchase, the buyer is typically given an invoice with the terms of the credit sale, including the amount due and the date by which payment should be made. These terms can vary widely, but a common arrangement is “net 30,” which means the full payment is due within 30 days of the invoice date.
Credit sales are essentially a short-term loan from the seller to the buyer, and as such, they come with some degree of credit risk. If a customer fails to pay as agreed, the seller may have to take action to collect the debt, which can be costly and time-consuming. For this reason, businesses usually have policies and procedures in place to assess the creditworthiness of customers before extending credit to them.
From the seller’s perspective, credit sales are recorded as accounts receivable on the balance sheet until the customer pays the invoice. From the buyer’s perspective, they are recorded as accounts payable.
Example of Credit Sales
Let’s consider an example involving two businesses: a wholesale electronics supplier named “ElectroWholesale” and a retailer named “GadgetStore.”
GadgetStore needs to purchase 50 laptops from ElectroWholesale to stock its shelves. The total cost of the laptops is $25,000. Instead of paying for the laptops upfront, GadgetStore requests to buy the laptops on credit, as they expect to generate revenue from laptop sales over the next few weeks.
ElectroWholesale agrees to the credit sale and issues an invoice to GadgetStore with the terms “net 30,” which means GadgetStore has 30 days to pay the full amount of $25,000.
After receiving the laptops, GadgetStore sells them to its customers over the next few weeks, generating enough revenue to pay the invoice from ElectroWholesale. On day 25, GadgetStore sends the payment of $25,000 to ElectroWholesale, fulfilling its obligation under the credit sale terms.
In this example, ElectroWholesale extended credit to GadgetStore, allowing GadgetStore to acquire the laptops without immediate payment. This arrangement provided GadgetStore with the opportunity to sell the laptops and generate revenue before having to pay for the inventory. However, ElectroWholesale took on some credit risk, as there was a possibility that GadgetStore might not have paid the invoice on time or at all.