A company's financial statements contain a great deal of information, and you may not need all of that information at a given time. You can quickly pick out a specific section of that data, such as annual credit sales, if you know where to find it within the statements.
You find credit sales in the "short-term assets" section of a balance sheet and in the "total sales revenue" section of a statement of profit and loss. However, credit sales also affect the other two accounting data synopses: Statements of cash flows and equity reports.
A credit sale doesn't require any cash to be paid before the delivery of merchandise or the provision of a service. This type of transaction runs counter to a cash deal, which mandates that a client pay before a vendor ships goods or performs services. To record a credit sale, a corporate bookkeeper debits the customer receivables account and credits the sales revenue account. Don't mistake a credit sale for a credit transaction, which generally pertains to a borrowing arrangement.
Credit sales interact with a balance sheet through the customer receivables account, which is a short-term asset. Along with merchandise and cash, accounts receivable represent resources a business will use in the next 12 months. Long-term assets are those that will not be liquidate for at least 52 weeks. Examples include real property, production equipment, manufacturing plants and computer gear, all of which go under the "property, plant and equipment" section of a balance sheet.
Credit sales flow into the top-line section of a statement of profit and loss – the other name for an income statement, or statement of income. In the top-line category you also find merchandise expense, also known as cost of sale or cost of goods sold. Total sales minus merchandise expense equals gross profit, a measure of top-line growth. Don't mistake this for the bottom line, which is the net performance result an organization publishes at the end of a given period – say, a month or fiscal quarter.
Cash Flow Statement
A credit sale doesn't directly affect a statement of cash flows because it involves no monetary element. However, a liquidity report – an identical term for a statement of cash flows – prepared under the indirect method touches on credit sales and accounts receivable. To calculate cash flows from operating activities, financial managers add a decrease in customer receivables back to net income, doing the opposite for an increase in the accounts' value. This makes sense, because a decrease in accounts receivable means more money coming in corporate coffers.
Credit sales affect an equity statement through the retained earnings account. Sales revenue increases a company's net income, which ultimately flows into retained earnings, which is an equity statement item.