How to account for credit sales

What is credit sales in the first place? Credit sales is the business activity of selling goods and services for a payment in the future. In other words, the buyer (ie trade debtor) carry away with him/her the products to his or her premises without making any payment for the same goods.

When the seller which is the business in question sells goods on credit, he creates a trade debtor for the business.

Trade debtor is the person or an organization who owes the business some amount of cash as a result of goods previously sold by the business in question on credit. The amount the business owe to the trade debtor is also referred to as accounts receivable

Accounting treatment for credit sales;

DR Trade debtors a/c

CR Sales  a/c

 

NB1: Trade debtors are categorized as current assets in the statement of financial position (ie balance sheet) of the business.

NB2: Trade debtors perspective applies where by the business had bought the same goods with the intention of re-selling the same goods. For example, if the business main objective in the memorandum of association was to buy and sell furniture as the main trading activity, then any sale of furniture made on credit results to a trade debtor

 

When the debtor is given discount-ie discount allowed

DR Discount Allowed a/c

CR Trade Debtor   a/c

 

When the trade debtor pays his/her debt by cash

DR Cashbook-cash column

CR Trade Debtor a/c

 

When the trade debtor pays his/her debt by check

DR Cashbook-bank column

CR Trade Debtor a/c

 

When the business has a trade debtor whereby the trade debtor has also sold goods on credit to the business in question-ie contra entry settlement

DR Trade creditor-A a/c

CR Trade debtor-A a/c

 

When the check paid by the trade debtor is dishonored by the bank

Dr Trade debtor a/c

Cr Bank a/c

 

When the customer (trade debtor) accepts a bill of exchange

DR Bills of exchange receivable a/c

CR Trade debtors a/c

 

When the cash is refunded by the business to the trade debtor

DR Trade debtor a/c

CR Cashbook

 

When customer returns goods to the business

DR Returns inwards a/c

CR Trade debtor a/c

 

NB3: What about other credit sales? Sometimes the business may dispose (ie sell a on-current asset) on credit. Other debtors perspective applies where by the business had bought goods (capital goods) with the intention of furthering day to day business operations. For example, if the business main objective in the memorandum of association was to buy and sell furniture as the main trading activity and at the same time the business had acquired office furniture for office use. Then if the office furniture is sold (disposed) on credit, this forms other trade debtors category

Just like in the case of trade debtors, the other debtor category will be treated as a current asset in the statement of financial position.