The customer paid with a bank card, and the bank charged a 2% fee. Assume that Bassam Abu Rayyan Company sold merchandise to a customer for $1,000. Some bank-card based transactions are essentially regarded as cash sales since funding is immediate. The accounting for credit card sales depends on the nature of the card. In addition, the added transaction cost is offset by a reduction in the internal costs associated with maintaining a credit department. Nevertheless, merchants tend to welcome their use because collection is virtually assured and very timely (oftentimes same day funding of the transaction is made by the credit card company). These credit card companies earn money off of these cards by charging merchant fees (usually a formula-based percentage of sales) and assess interest and other charges against the users. Popular examples include MasterCard, Visa, and American Express. And, merchants frequently note that the availability of credit entices customers to make a purchase decision.īanks and financial services companies have developed credit cards that are widely accepted by many merchants, and eliminate the necessity of those merchants maintaining separate credit departments. Depending on the nature of the credit relationship, some credit costs may be offset by interest charges. Occasionally, a creditor will get burned when the borrower refuses or is unable to pay. In addition, the creditor must forego alternative uses of money while credit is extended.
Credit providers must conduct investigations of credit worthiness, and monitor collection activities. While the availability of credit facilitates many business transactions, it is also costly. Likewise, sales to customers may directly (by the vendor offering credit) or indirectly (through a bank or credit card company) entail the extension of credit. Purchases of inventory and supplies will often be made on account. To one degree or another, many business transactions result in the extension of credit. Nontrade receivables arise from other transactions and events, including advances to employees and utility company deposits. Such trade receivables are carried in the Accounts Receivable account. The majority of receivables are classified as trade receivables, which arise from the sale of products or services to customers.
You already know that receivables arise from a variety of claims against customers and others, and are generally classified as current or noncurrent based on expectations about the amount of time it will take to collect them. The Costs and Benefits of Selling on Credit
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