Definition of Sale on Credit
A sale on credit is revenue earned by a company when it sells goods and allows the buyer to pay at a later date. This is also referred to as a sale on account.
Normally, this means that the company selling the goods is transferring ownership of its goods to the buyer and in return has a current asset known as accounts receivable. One consequence is the seller becomes one of the buyer’s unsecured creditors. This means that the seller has the risk of bad debts expense if the buyer does not pay the full amount owed to the seller.
Example of a Sale on Credit
Assume that a company is in an industry where it is necessary to give customers invoice payment terms of net 30 days. If the company sells $10,000 of goods to a customer with those terms, the company will debit Accounts Receivable for $10,0000 and will credit Sales for $10,000. When the company receives the $10,000 from the customer, the company will debit Cash for $10,000 and will credit Accounts Receivable for $10,000.
