6.3.1: Credit Transactions
‘Buying on credit’ means receiving goods or services straight away and paying for them later. Similarly for ‘selling on credit’: good or services are sold to a customer, who will pay for them later.
A credit transaction doesn’t refer to using a credit card.
Many stores don’t offer ‘credit terms’ to their customers. They require full payment immediately in cash or by card. If the business does offer credit terms, they will assess each customer and set a credit limit. In other words, how much they can buy on credit before payment is required.
A credit transaction doesn’t refer to using a credit card.
Many stores don’t offer ‘credit terms’ to their customers. They require full payment immediately in cash or by card. If the business does offer credit terms, they will assess each customer and set a credit limit. In other words, how much they can buy on credit before payment is required.
Selling goods or services on credit: Accounts Receivable / Trade Debtors
Also known as Trade Debtors, or just Debtors, Accounts Receivable represents funds owing to the organisation by its customers and is therefore an asset account. The asset arises because the organisation has made a sale to a customer, and has thereby earned the right to be paid, even though it has allowed the customer to pay later. This right to be paid is valuable and hence an asset.
Students often become concerned that the sale, and therefore the consequent asset, should not be recorded because the organisation has not been paid. Provided that at the time of making the sale the organisation had a reasonable expectation of being paid by the customer, it is appropriate to record the sale event and the consequent asset in the reporting period that the sale took place.
In the General Ledger, there will often be a sub-ledger used for Accounts Receivable, just the same as there is often one used for Accounts Payable. The sub-ledger would be made up of many accounts, one for each entity that is a receivable. The total of all the accounts in the sub-ledger is the amount shown in the balance sheet for Accounts Receivable.
[Duration: 4:14]
Also known as Trade Debtors, or just Debtors, Accounts Receivable represents funds owing to the organisation by its customers and is therefore an asset account. The asset arises because the organisation has made a sale to a customer, and has thereby earned the right to be paid, even though it has allowed the customer to pay later. This right to be paid is valuable and hence an asset.
Students often become concerned that the sale, and therefore the consequent asset, should not be recorded because the organisation has not been paid. Provided that at the time of making the sale the organisation had a reasonable expectation of being paid by the customer, it is appropriate to record the sale event and the consequent asset in the reporting period that the sale took place.
In the General Ledger, there will often be a sub-ledger used for Accounts Receivable, just the same as there is often one used for Accounts Payable. The sub-ledger would be made up of many accounts, one for each entity that is a receivable. The total of all the accounts in the sub-ledger is the amount shown in the balance sheet for Accounts Receivable.
[Duration: 4:14]
Buying goods or services on credit: Accounts Payable / Trade Creditors
Also known as Trade Payables, Trade Creditors or simply Creditors, Accounts Payable (AP) represents a debt owed to a supplier and is therefore a liability account. Typically the debt will be settled by the payment of cash to the supplier within their trading terms: perhaps 7, 14 or 30 days. This expectation of imminent settlement with cash is what differentiates Accounts Payable from other liability accounts such as Unearned Income (settled by providing a service) or a bank loan (typically settled over a longer term).
The Account Payable debt owed to the supplier arises because the supplier has provided the business with goods (such as equipment or inventory) or services (such as cleaning or electricity), provided the business with an invoice but has allowed the business to pay later. The equipment purchase would be recorded as an increase in assets and the cleaning expense incurred would be recorded as an expense.
Accounts Payable is a popular source of short-term finance for a business because it is free, provided you keep to the credit terms of the supplier. It can be used to at least partially offset the impact of the business also providing credit to its customers (Accounts Receivable).
[Duration: 5:09]
Also known as Trade Payables, Trade Creditors or simply Creditors, Accounts Payable (AP) represents a debt owed to a supplier and is therefore a liability account. Typically the debt will be settled by the payment of cash to the supplier within their trading terms: perhaps 7, 14 or 30 days. This expectation of imminent settlement with cash is what differentiates Accounts Payable from other liability accounts such as Unearned Income (settled by providing a service) or a bank loan (typically settled over a longer term).
The Account Payable debt owed to the supplier arises because the supplier has provided the business with goods (such as equipment or inventory) or services (such as cleaning or electricity), provided the business with an invoice but has allowed the business to pay later. The equipment purchase would be recorded as an increase in assets and the cleaning expense incurred would be recorded as an expense.
Accounts Payable is a popular source of short-term finance for a business because it is free, provided you keep to the credit terms of the supplier. It can be used to at least partially offset the impact of the business also providing credit to its customers (Accounts Receivable).
[Duration: 5:09]