6.3 Credit Transactions
‘Buying on credit’ means receiving goods or services straight away and paying for them later. Similarly for ‘selling on credit’: goods or services are sold to a customer, who will pay for them later.
A credit transaction doesn’t require the use of a credit card. This is a how the credit card holder can turn a cash purchase into a credit purchase. For the merchant, the transaction is still treated like a cash sale.
Many stores don’t offer ‘credit terms’ to their customers. They require full payment immediately in cash or using a debit or credit card. If the business does offer credit terms, they will assess each customer and set a credit limit. In other words, how much the customer can buy on credit before payment is required.
A credit transaction doesn’t require the use of a credit card. This is a how the credit card holder can turn a cash purchase into a credit purchase. For the merchant, the transaction is still treated like a cash sale.
Many stores don’t offer ‘credit terms’ to their customers. They require full payment immediately in cash or using a debit or credit card. If the business does offer credit terms, they will assess each customer and set a credit limit. In other words, how much the customer 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. The right to be paid (the asset) has been generated and the consequent revenue has been earned.
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 Accounts Receivable sub-ledger would be made up of many accounts, one for each customer that owes us money for a credit sale. The total of all the accounts in the sub-ledger is the amount shown in the balance sheet for Accounts Receivable, and vice versa for Accounts Payable.
[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. The right to be paid (the asset) has been generated and the consequent revenue has been earned.
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 Accounts Receivable sub-ledger would be made up of many accounts, one for each customer that owes us money for a credit sale. The total of all the accounts in the sub-ledger is the amount shown in the balance sheet for Accounts Receivable, and vice versa for Accounts Payable.
[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). If your business runs its sales on cash (zero or very limited Accounts Receivable), and makes extensive use of Accounts Payable, that can have a very beneficial impact on their cash management and need for other debt to fund their working capital.
[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). If your business runs its sales on cash (zero or very limited Accounts Receivable), and makes extensive use of Accounts Payable, that can have a very beneficial impact on their cash management and need for other debt to fund their working capital.
[Duration: 5:09]