What is a credit application?
The form a customer fills out to buy on account. Approval and a dollar ceiling come later, and the form itself does not post to the books.
Definition
A credit application is the packet a customer submits so a shop can decide whether to sell on account. It is paperwork, not a journal, and it does not change accounts receivable by itself.
The form gathers facts the shop will use later. Approval, a dollar ceiling, and a due-date rule come after the packet is in, not when it is signed.
Where it shows up
Balance Sheet: Related to nothing until approved sales later create a receivable.
P&L: Related to nothing extra.
Cash flow: Related to nothing extra.
See also: Credit Limit · Customer Credit Check · Payment Terms
You will not find this form on the Balance Sheet. Later approved sales create a receivable in current assets, and the form is only the request that came first.
The Income Statement does not change when a customer submits the form. Revenue waits until you actually deliver and bill.
Cash does not move when the form arrives. Operating cash later depends on invoices that follow a yes, and on whether those invoices collect.
The filled form usually lives in a customer file or on the customer record in the accounting app. It is evidence of what the customer claimed, and of what you agreed to look at before offering terms.
How it works
The shop hands the form to a customer who wants to charge instead of paying at pickup. The customer lists legal name, addresses, owners, bank or trade references, and how much they expect to buy.
The shop reviews that packet before the first invoice on account goes out. A yes, a no, or a smaller yes comes after the review, not from the blank form alone.
A yes still needs two follow-on decisions. One is the dollar ceiling the customer may carry, and the other is when each invoice will be due.
The form is not the agreement to deliver goods. It is the request to be trusted for later payment, and some shops attach it to a signed customer agreement.
If the shop says no, the customer can still buy with cash or a card. No receivable is created from the form itself.
If the shop says yes, later sales on account create invoices and receivables. The form stays on file so you can see what you relied on.
You can ask for an updated form when ownership changes or when the customer wants a higher ceiling. The new form is still not a journal.
A missing or thin form is a reason to wait. You are asking the customer to put facts on paper before you let an unpaid balance sit on your books.
Example
A cafe wants to charge weekly bread from a florist instead of paying at each delivery. The florist sends a one-page form.
The cafe lists its legal name, owner, delivery address, and two trade references. It asks to charge about $2,000 a month.
The florist does not post a journal when the form arrives. The books stay unchanged until the florist says yes and later issues an invoice for bread.
If the florist later says yes, the first bread invoice creates the receivable. If the florist says no, the cafe pays at delivery and the form is only a record of a request that was declined.
Common mix-ups
A credit application is not a credit limit. The application is the form, and the limit is the dollar ceiling you may assign after you say yes.
A credit application is not a customer credit check. The form is what the customer gives you, and the check is the work you do with that form and with outside facts.
A credit application is not payment terms. The form may ask which due date the customer wants, and the terms are the due-date rule you actually grant.
A credit application is not an invoice. The invoice bills goods already delivered, and the form is only a request to be allowed to owe you later.
Related terms
- Credit Limit: The maximum balance a customer is allowed to carry on account.
- Customer Credit Check: The review of a customer's ability to pay before granting terms.
- Payment Terms: The agreed deadline and conditions for paying an invoice.
- Accounts Receivable: Money customers owe the business for goods or services already delivered.
- Sales Order: The internal record of a customer's confirmed order.
- Collections: The process of following up on unpaid customer invoices.
- Contract: The binding agreement that sets what will be delivered and what will be paid.
- Internal Controls: The procedures that keep the books accurate and assets protected.