Credit Sales vs Accounts Receivable
As most of the business organizations, nowadays, offer credit facilities to their customers, it is very useful to know the difference between credit sales and accounts receivables. Businesses allow them to pay for the goods and services that they purchase at a later date (within specifically given / agreed period) after the purchase is being made. This process is known as credit sales. As a result of selling goods on credit basis, accounts receivables (trade debtors) exist. Accounts receivable is the total amount that the customers are owed to pay for the organization. Both of the concepts exist from the same phenomenon, but there are some significant differences between credit sales and accounts receivables. The key difference is that, credit sales is an income generating item, recorded in the income statement for particular periods whereas accounts receivables is known as a short-term (current) asset, recorded in the balance sheet as at to a particular date.
What are Credit Sales?
Credit sales refer to non-cash sales where customers are allowed to make payments for the goods or services that they purchase at a later date. Here the buyer has an opportunity to pay for the goods in the future by either the full amount in one payment or by small regular installments over a period agreed by both parties.
What are Accounts Receivables?
Accounts receivables represent the total amount owed by a customer to the business organization as a result of purchasing goods or services on credit basis. Since this amount is something owned by the organization, but not yet received, it is identified as an asset and recorded under current assets in the balance sheet.
Similarities between Credit Sales and Accounts Receivable
• Both of the concepts originate from the same point, i.e. credit sales
• Use same set of source documents to record transactions (Ex- Sales invoices)
What is the difference between Credit Sales and Accounts Receivable?
• Credit sales are a source of income, while accounts receivables are an asset.
• Credit sales are the results in the increase in total income of the organization. Accounts receivables are results in the increase in total assets of the organization .
• Credit sales are presented in Income Statement under sales category. Accounts receivables are presented in Balance Sheet under short-term assets .
• Credit sales are calculated for a specific period (Ex- Monthly / annual credit sales). Accounts receivables are an accumulative value. This value represents total due of customers as at a particular date.
• Credit sales determine profitability of the business while accounts receivables determine liquidity of the business.
• Credit sales are an unsecured promise made by the customers at the point of the sales being made. Accounts receivables can make provision to minimize the insecurity, to offset uncollectable amount of debts (Ex: Bad debts, Provision for doubtful debts).
Selling goods on credit basis creates accounts receivables, i.e. one depends on other. Credit sale is a source of income and is recorded in the income statement, particularly for a specific period. In contrast, accounts receivable is a type of short-term asset, recorded in the balance sheet of the book of accounts. This is the sum of total amount payable , so not specific for a particular period.