Cash vs Credit Sales
A practical guide to cash and credit sales, covering accounting treatment, cash flow implications, credit risk management and when each approach suits your business.
Every sale your business makes is either a cash sale (payment received at the point of sale) or a credit sale (payment collected later, after goods or services have been delivered). The distinction affects your accounting entries, cash flow, tax treatment and the way you manage working capital.
Most B2B businesses operate primarily on credit terms. Most retail and hospitality businesses operate on cash terms. Many businesses use both, depending on the customer and the transaction.
Key differences
| Factor | Cash sale | Credit sale |
|---|---|---|
| When payment is received | At the time of sale | After an agreed credit period (e.g. 30 days) |
| Accounting entry at point of sale | Debit bank, credit revenue | Debit accounts receivable, credit revenue |
| Cash flow impact | Immediate | Delayed |
| Risk of non-payment | None (already paid) | Customer may default |
| Admin overhead | Lower | Higher (invoicing, credit control, debt chasing) |
| Common in | Retail, hospitality, e-commerce | B2B, professional services, wholesale, construction |
Accounting treatment
Cash sales
When a customer pays immediately, the accounting entry is straightforward:
| Account | Debit | Credit |
|---|---|---|
| Bank (or cash) | Sale amount | |
| Revenue | Sale amount |
If VAT applies, the entry includes a credit to the VAT liability account for the output VAT element.
Revenue is recognised and cash is received simultaneously. There is no debtor to manage and no risk of non-payment.
Credit sales
When goods or services are provided on credit, two separate events occur:
At the point of sale:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable (trade debtors) | Invoice amount | |
| Revenue | Net amount | |
| VAT liability | VAT amount |
When the customer pays:
| Account | Debit | Credit |
|---|---|---|
| Bank | Payment amount | |
| Accounts receivable | Payment amount |
The accounts receivable balance represents money owed to you by customers. It appears as a current asset on your balance sheet until the invoice is paid.
Cash flow implications
The timing difference between recognising revenue and receiving cash is one of the biggest working capital challenges for growing businesses. You may be profitable on paper but short of actual cash because your customers have not yet paid.
| Scenario | Revenue recognised | Cash received | Gap |
|---|---|---|---|
| Cash sale in January | January | January | None |
| Credit sale in January, 30-day terms | January | February | 30 days |
| Credit sale in January, 60-day terms | January | March | 60 days |
| Credit sale in January, customer pays late | January | April or later | 90+ days |
Multiplied across hundreds of invoices, these gaps can create serious cash flow pressure – especially if your own suppliers demand payment on shorter terms.
VAT and cash accounting
Under standard VAT accounting, you must account for output VAT when you issue the invoice, regardless of when the customer pays. This means you may be paying VAT to HMRC before your customer has paid you.
The VAT cash accounting scheme allows businesses with taxable turnover below £1,350,000 to account for VAT only when payment is received. This significantly helps cash flow for businesses with long credit terms.
| VAT scheme | When you account for output VAT |
|---|---|
| Standard accounting | When you issue the invoice |
| Cash accounting | When the customer pays |
Managing credit sales
Setting credit terms
Define clear payment terms before extending credit. Standard terms in the UK include:
- Net 30 – payment due within 30 days of the invoice date
- Net 14 – common for smaller businesses and new customers
- Net 60 or Net 90 – sometimes demanded by larger buyers
- COD (cash on delivery) – payment on receipt of goods
Always state your payment terms on the invoice and in your terms of business. Under the Late Payment of Commercial Debts (Interest) Act 1998, you can charge statutory interest of 8% plus the Bank of England base rate on overdue commercial invoices.
Credit checks
Before extending credit to a new customer, assess their ability to pay:
- Company credit reports from agencies such as Experian, Creditsafe or Dun & Bradstreet
- Companies House accounts – check the customer’s filed accounts for profitability and liquidity
- Trade references – ask for references from two or three of the customer’s existing suppliers
- Credit limit – set a maximum amount of credit you will extend to that customer at any one time
Credit control
Active credit control reduces the average time it takes customers to pay and minimises bad debts:
- Invoice promptly – do not wait until month end; invoice as soon as the work is done or goods are delivered
- Send payment reminders before the due date
- Follow up immediately on overdue invoices
- Review aged debtors weekly – the longer an invoice is overdue, the less likely it is to be paid
- Escalate systematically – polite reminder, phone call, formal letter, then debt recovery action
Bad debts
Despite the best credit control, some customers will not pay. When an invoice becomes uncollectable, you write it off as a bad debt:
| Account | Debit | Credit |
|---|---|---|
| Bad debt expense | Write-off amount | |
| Accounts receivable | Write-off amount |
If you have already accounted for VAT on the invoice and the debt is more than six months overdue, you can reclaim the output VAT through bad debt relief on your VAT return.
When to use each approach
| Cash sales suit | Credit sales suit |
|---|---|
| Retail and consumer transactions | B2B transactions with established customers |
| Low-value, high-volume sales | Higher-value sales where credit is industry standard |
| Businesses with tight cash flow | Businesses with strong working capital |
| New customers with no credit history | Long-term customer relationships |
| Online sales with immediate payment | Project-based or phased billing |
Many businesses use a hybrid approach – cash terms for new customers and small orders, credit terms for established accounts. This balances cash flow protection with the commercial flexibility that credit sales provide.
Monitoring performance
Track these metrics to manage your mix of cash and credit sales:
- Days sales outstanding (DSO) – average number of days it takes to collect payment on credit sales
- Aged debtors analysis – breakdown of outstanding invoices by age (current, 30 days, 60 days, 90+ days)
- Bad debt ratio – bad debts as a percentage of total credit sales
- Cash conversion cycle – time between paying your suppliers and collecting from your customers