Recording Credit Sales

This situation is not much different than cash sales.

 Real life

A customer calls your warehouse and orders a case of 24 bottles of wine. You ship it out to the customer the next day FOB warehouse (see below for definition) with an invoice attached. Your invoice states that you have 30-day terms on your credit sales.

 Accounting world

The criteria for a sale were met on the day the wine was shipped to the customer. You traded something of value (wine) for something of equal value (accounts receivable). Accounts receivable is an asset to you because it represents a promise to pay cash in the future.

A quick word about FOB: This term seems to be fading into the twilight, but the concept is important. FOB (free on board) indicates at what point the rights and responsibilities of ownership pass to the purchaser. For example, if something is shipped FOB warehouse, the vendor is declaring that the sale exists when the product leaves the warehouse.' That is when the purchaser officially "bought" it.

However, if it is shipped FOB destination, the vendor is declaring that he or she is responsible for the goods until they have been safely received at the purchaser's premises. In many purchase situations, this timing is not an issue, but you can see how it is important when goods are shipped overseas. Who is out of pocket if the ship sinks? If it was shipped FOB warehouse, then the purchaser is responsible for the loss (or, more likely, for purchasing insurance to cover the loss). If it was shipped FOB destination, the liability remains with the vendor.

In the example above, the goods were shipped FOB warehouse, so the transaction becomes a sale the day it is shipped. The accounting is as follows:

You can sometimes expedite your collections by offering your customers a discount for early payment. For example, if you offer 30­day terms, that means that your customers must pay your invoices in full within 30 days. However, you could offer terms such as 2/10 net 30, which means that your customers will get a 2 percent discount on their invoices if they pay you within 10 days; otherwise, the bill is due in full in 30 days.

Let's use the example from above. The customer's bill was $1,380, including retail taxes. The customer pays within 10 days and therefore takes the discount. You will know this because the customer sends you a check for $1,352.40 instead of one for $1,380. (Be aware, however, that frequently customers will try to stretch the discount, sending you a check after the 10 days is up.) You would have recorded the sale and account receivable in your books at the original invoice amount of $1,380. Remember that the original sales entry looked like this:

            DR     Accounts receivable           $1,380

            CR     Sales                                                    $1,200

            CR     Retail tax liability                                      180

But now you have a cash receipt of only $1,352.40. There are two ways to record this discount.

You know you need to take the full amount out of the receivable account because the customer doesn't owe you anymore. You could reverse the difference directly to the sales account (along with the associated retail sales tax). The entry would look like this:

The details of the receivable would be listed in a subledger, whether manual or computerized. The subledger gives you a snapshot in time showing all amounts still receivable from customers and how old these receivables are (e.g., current, 30 days, 60 days, 90 days).

In a computer program, you will still go into the sales journal (just like the cash sale) and record the amount of the sale along with the type and amount of taxes, but you will not record a payment (because there hasn't been one yet). This will leave the amount showing as outstanding on the accounts receivable listing.