Credit is a large part of doing business. Yes, sometimes business pay with cash, but much of the business world relies on credit, both for buying and selling. So learning to properly account for such transactions is highly important.

When making a sale on credit is that the journal entry no longer debits Cash, but rather debits Accounts Receivable. So instead of saying "Yay, we got cash!" we say "Yay, you owe us money!

When selling on credit, an important factor to consider are the TERMS. It is very rare that a business will sell something on credit, and not tell the customer when they expect the customer to pay. Rather, when a company grants credit, it specifies the credit period. Usually this is stated in terms of "net..." For example, Net 30 means the invoice is due in 30 days. Likewise, Net 45 or n/45, would mean the invoice is due in 45 days.

Selling on credit may also come with a sales discount for customers who pay their bill early. You may see a payment term listed as 2/10,n/30. This means there is a 2% discount if paid within 10 days and if not paid within 10 days, the full amount is due in 30 days.

Of course, selling on credit opens a company up to the risk of Bad Debts. This is the risk that your customer will not pay you. And We will talk about this next time.

Until then, how do you think Returns and Allowances fit into this topic?

Answer rating: 100% (QA)

Answer Returns and Allowances are an important consideration when selling on credit Heres how they f... View the full answer