What is the Formula for Credit Sale & its types ?

Credit sales refer to a sale in which the amount owed for received goods or services will be paid at a later date.

Table of Contents

1. What are Credit Sales?
2. Types of Sales Transactions
3. Credit Terms and Credit Sales
4. Advantages and Disadvantages of Credit Sales

What are Credit Sales?

Credit sales refer to a sale in which the amount owed for received goods or services will be paid at a later date. Credit sales are the purchases made by the customers who do not render the payment in full at the time of purchase.

Types of Sales Transactions

Mainly, there are three types of sales transactions: Cash sales, credit sales, and advance payment sales. The sales type is simply determined by looking at the timing of when the cash is received. The three main types of sales transactions are as follows:

1. Cash Sales – Cash is collected when the sale is made, and the goods or services are delivered to the customer. Here the consideration for the sale is settled in cash or cash equivalents by the buyer. 
2. Credit Sales – Customers are given a period of time after the sale is made. The customer has to repay the seller in this time period. 
3. Advanced payment sales – In this type, the customer’s pay the seller in advance before the sale is made. The advanced payment is a partial amount of full consideration and sometimes, it could be full consideration as well. 

Credit Terms and Credit Sales

It is very common for credit sales to include credit terms. Credit terms are terms that indicate when payment is due for sales that are made on credit, possible discounts, and any applicable interest or late payment fees. For e.g., the credit terms are 2/10, net 30. This means that the amount is due in the next 30 days. However, if the payment is made within 10 days, the customer will get a 2% discount on the amount due. 

Assume a Company ABC sold goods worth $100,000 to Alex. Company ABC offers credit terms 5/20, net 60. If Alex pays the amount owed within 20 days, she will get a discount of 5% on the total amount due i.e., $100,000. As a result, Alex will only have to pay $95,000 if she pays the amount due within 20 days. Otherwise, she would have to pay the entire amount of $100,000 within 60 days. 

Advantages and Disadvantages

Credit sales are sales where the customer is given an extended period to pay. There are several advantages and disadvantages for a company offering credit sales to customers. 

Advantages:

• Credit sales can be sued to attract new customers. Offering credit can increase the number of customers that will purchase from the company. 
• Customers are sometimes without enough cash on hand. Offering credit gives the customers the flexibility to go ahead and buy now and pay for the purchases at a later date. 

Disadvantages:

• There is a possibility of the customer going bankrupt. If the customers go bankrupt, the amount owed may be unrecoverable and must be written off. 
• The cost of the collection may decrease the profits. If a customer misses the payment or refuses to pay, the company may incur a loss in trying to obtain the payment.