Sales on Credit - Research Paper Example

More than that, the firms allow sales of large volume of goods on credit to ensure a larger increase in its applicability to customers. As a result, companies focus on more credit sales to improve sales, ensure attainment of success with the intense competition among business firms while offering the customers with flexible terms of payment that suit them. Considerably sales on credit involve increased allocation for general-purpose credit cards, accounts receivable, notes payable and bad debts entries in the books of accounts.

General Preview of Sales on Credit Even though, the option of selling goods to customers for cash remains viable companies have to allow room for sales on credit. More significantly, credit trade acts as an important factor in both, the sales and procurement operations and the corporate asset-liability management as it ensures success in meeting the targeted market of customers. With more risks associated with sales of goods on credit, a company incurs more cost account receivable as the anticipated payment accrue while the likelihood of bad debt occurrence depends on the credit ability of the customers (Warren, Reeve & Duchac 361).

In most cases, companies carry out credit analysis of the respective clients who wish to be issued goods and services on credit as a way of being assured that the amount of money owed would be paid. As a result, the company seeks information about the history of the firm’s or individual borrowing through the different relationships with sources of finance to ascertain the liquidity and capability level of the recipient to service the debt (Warren, Reeve & Duchac 362). It is therefore, essential to understand the customer’s profile on whether or not the company will suffer any likely loss from the provision of trade credit.

Forms of Sales on Credit Accounts Receivable More significantly, the accounts receivable in a company gives the value of money owed after offering sales for merchandise or services to customers in an open account. Therefore, the value of accounts receivable show the expected payment to be collected for providing a customer with a good or service on credit within the specified terms. Above all, the terms and conditions that govern the credit sale are clearly integrated in the seller’s invoice issued to the buyer (Warren, Reeve & Duchac 361).

With the invoice issued only by the seller as evidence of the credit sale, there is no other written evidence of debt executed in the credit contract of the seller and buyer. However, there is always a need for receivables management in organizations that issue credit sales. More importantly, the credit sale involves an element of risk because there is no certainty based on the payment for the goods and services within the stipulated period calling for careful analysis of the risk involved before issuing credit.

Accounts receivables is based on economic value as the buyers utilize their economic value of the goods and services immediately, whereas the seller gets an economic value later when payments are made(Warren, Reeve & Duchac 361). Finally, accounts receivables are accompanied by an element of futurity as the buyer make payment at a future period. As a credit sale, it involves pledging of payments later on accounts receivable financing companies can use it as a security for financing a loan. This is because, the pledging of accounts recei