A customer purchased an item on credit which journal entry should be made to record this purchase

Credit sales refer to the purchases that the customers make with delayed payment. As the customers do not need to make the payment immediately after the purchase, they can generate cash by using the merchandise they bought so that they can pay the seller. Hence, reasonable payment terms enable the customers to buy more goods or merchandise.

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What are Credit Sales?
Types of Sales Transactions
Credit Terms and Credit Sales
How to Record a Credit Sale
How to Record a Credit Sale with Credit Terms
Advantages and Disadvantages of Credit Sales
More Reading
What is the journal entry for purchase on credit?
In which journal should the following be recorded a customer purchases an item on credit?
Which journal is used to record credit purchases?

Accounting for credit sales can be quite complicated sometimes as the timing of providing the goods or services is different from the timing the company receives payment from the customer. To ensure accurate entries and accounting treatment, business owners may consider engaging a bookkeeping firm in Singapore and let the professionals help them. This prevents the business owners from messing up the books of accounts of their business. Also, with the help of the experts, they do not need to spend much time on accounting-related tasks too.

When the company has made a sale to its customer on credit, it should record journal entries for credit sales in the sales journal. To record such transactions, the accountants will debit the accounts receivable (Also see Differentiating Between A Company’s Accounts Receivable and Accounts Payable) account or the debtor account and credit the sales account. When the accounts receivable account is debited, the company’s asset will increase. This is because the company will receive that amount in the future, and there is a corresponding credit in the sales account. As a result, the revenue of the company will increase.

When the company receives cash for the credit sale, the company will debit the cash account due to the receipt of cash for the goods that it has sold on credit. Then, it should credit the accounts receivable account as it had debited the account when the sales were made, and thus, it should credit this account when the customer has made the payment.

Now, how should the company show the accounts receivable or debtors, credit sales and bank balance in its financial statements (Also see 4 Things About Financial Statements Every Business Owner Should Know)? As the accounts receivable or debtors are the company’s current assets, this item will appear in its balance sheet in the asset section under current assets. For all sales that the company has made, no matter the sales were made by cash or on credit, the company should record the selling price of the goods in its profit and loss account under the income section. On the other hand, bank balance will appear in the company’s balance sheet under the asset section (Also see Accounting – Balance Sheet – Asset Accounts) as one of the current assets too.

In conclusion, journal entries for credit sales play a crucial role in recording the transactions regarding the credit sales that the company has made. With the help of these entries, the company will be able to trace the outstanding balances that its customers have not paid on any date. Hence, it will be able to check the balances due to the customers if they ask for credit sales from the company again.

Customer purchases to be paid at a later date

What are Credit Sales?

Credit sales refer to a sale in which the amount owed will be paid at a later date. In other words, credit sales are purchases made by customers who do not render payment in full, in cash, at the time of purchase. To learn more, check out CFI’s Credit Analyst Certification program.

Types of Sales Transactions

There are three main types of sales transactions: cash sales, credit sales, and advance payment sales. The difference between these sales transactions simply lies in the timing of when cash is received.

1. Cash sales: Cash is collected when the sale is made and the goods or services are delivered to the customer.

2. Credit sales: Customers are given a period of time after the sale is made to pay the seller.

3. Advance payment sales: Customers pay the seller in advance before the sale is made.

Credit Terms and Credit Sales

It is 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 example, the credit terms for credit sales may be 2/10, net 30. This means that the amount is due in 30 days (net 30). However, if the customer pays within 10 days, a 2% discount will be applied.

Assume Company A sold $10,000 worth of goods to Michael. Company A offers credit terms 5/10, net 30. If Michael pays the amount owed ($10,000) within 10 days, he would be able to enjoy a 5% discount. Therefore, the amount that Michael would need to pay for his purchases if he paid within 10 days would be $9,500.

How to Record a Credit Sale

On January 1, 2018, Company A sold computers and laptops to John on credit. The amount owed is $10,000, due on January 31, 2018. On January 30, 2018, John made the full payment of $10,000 for the computers and laptops.

The journal entries would be as follows:

Date	Account Title	Debit	Credit
January 1, 2018	Accounts Receivable	$10,000
	Sales		$10,000
To record the sale of goods to John on credit

Date	Account Title	Debit	Credit
January 30, 2018	Cash	$10,000
	Accounts Receivable		$10,000
To record the full payment made by John for purchases on January 1, 2018

How to Record a Credit Sale with Credit Terms

Consider the same example above – Company A selling goods to John on credit for $10,000, due on January 31, 2018. However, let us consider the effect of the credit terms 2/10 net 30 on this purchase.

The journal entries would be as follows:

Date	Account Title	Debit	Credit
January 1, 2018	Accounts Receivable	$10,000
	Sales		$10,000
To record the sale of goods to John on credit

John decides to take advantage of the credit terms and thus pays on January 5, 2018:

Date	Account Title	Debit	Credit
January 5, 2018	Cash	$9,800
	Cash Discount	$200
	Accounts Receivable		$10,000
To record the sale of goods to John on credit with the credit discount

John paid his invoice four days (January 5) after purchasing the goods on credit. Therefore, he would be able to enjoy a 2% discount on his credit purchase ($10,000 x 2% = $200).

Advantages and Disadvantages of Credit Sales

As previously mentioned, 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 used to more easily acquire new customers. Offering credit can attract new customers to purchase from the company.
Customers are sometimes without enough cash on hand. Offering credit gives customers the flexibility to go ahead and buy now and pay for purchases at a later date.

Disadvantages

Customers can potentially go bankrupt. If customers go bankrupt, the amount owed may be unrecoverable and must be written off.
Costs of collection may decrease profits. If a customer misses the payment or refuses to pay, the company may incur collection costs in trying to obtain the payment.

What is the journal entry for purchase on credit?

A purchase credit journal entry is recorded by a business in their purchases journal on the date a business purchases goods or services on credit from a third party. The business will debit the purchases account and credit the accounts payable account in the business's Purchases journal.

In which journal should the following be recorded a customer purchases an item on credit?

If it is a credit sale (also known as a sale on account), it is recorded in the sales journal. If it is a credit purchase (also known as a purchase on account), it is recorded in the purchases journal.