What is a Sales Credit Journal Entry?

How to Record Entry of Sales Credit?

When the goods are sold on credit to a buyer, the account receivable account debits, increasing the company’s assets as the amount is receivable from the third party. The corresponding credit will be in the sales account, increasing the company’s revenue. The entry to record the sales on credit is as follows:

When the company receives the cash against the goods sold on credit, the cash accounts will be credited as there is the receipt of the money against the goods sold on credit. There will be corresponding credit in the accounts receivable accounts as the account was initially debited at the time of sales of goods and thus will be credited once the amount is received. The entry to record the receipt against the sales on credit is as follows:

Example of Sales Credit Journal Entry

Example #1

Apple Inc is a laptop and computer dealer, and it sold goods to John Electronics on January 1, 2018, worth $50,000 on credit. Its credit periodCredit PeriodCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy.read more is 15 days. It means John Electronics must make the payment on or before January 30, 2018.

Below are the journal entries in the books of Apple Inc:

At the time of sale of laptop & Computer:

At the time of Receipt of Payment:

Example #2

Apple Inc gives cash discountsCash DiscountsCash discounts are direct incentives and discounts provided by any company to their customers in exchange for paying their bills on time or before the due date. This is a common practice, and the discount may differ from one company to the next depending on the terms and conditions.read more or early payment discounts. In the above example, Apple Inc is offering a 10% discount if John Electronics makes the payment on or before January 10, 2018. Accordingly, John Electronics made the payment on January 10, 2018.

Example #3

In the above example, John Electronics could not make payment by January 30, 2018, and it went bankrupt. And Apple Inc believes that outstanding debt is unrecoverable and is a bad debt now.

John Electronics will pass access for bad debtBad DebtBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.read more at the end of the financial year.

Example #4

ABC Inc sold goods worth $1,000 to XYZ Inc on January 1, 2019, on which 10% tax is applicable. XYZ Inc will make payment in two equal installments to ABC Inc.

Below entries will be passed in the books of ABC Inc:

At the time of credit sales:

In the above example, we assume the basis value of goods is $1,000. Therefore, we have charged 10% of tax on that value, which ABC Inc will collect from XYZ Inc and pay to the government, and ABC Inc can take input credit of the same amount and claim a refund from the government.

At the time of receiving of 1 Payment:

Example #5

For example, there is company A Ltd. which deals in selling the different products in the market. On August 1, 2019, it sold some goods to one of its customers on credit, amounting to $100,000. When selling the goods, the customer decided to pay full against the goods received after 15 days. On August 15, 2019, the customer paid the whole amount to the company. Now, how will the firm pass the journal entry to record the sales of the goods on credit and the receipt of cashReceipt Of CashA cash receipt is a small document that works as evidence that the amount of cash received during a transaction involves transferring cash or cash equivalent. The original copy of this receipt is given to the customer, while the seller keeps the other copy for accounting purposes.read more against the sales of goods?

Solution

On August 1, 2019, when the company sells the goods on credit to the buyer, they will debit the account receivable account with the corresponding credit to the sales account. Therefore, the entry to record the sales on credit is as follows:

On August 15, 2019, when the customer paid the whole amount in cash to the company against the goods sold on credit on August 1, 2019, the cash accounts will be credited with the corresponding credit in the accounts receivable accounts. The entry to record the receipt against the sales on credit is as follows:

How to show Credit Sales in Financial Statements?

Now we will understand how to show all the above entries in financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.

  • Credit Sales: Sales, whether cash or credit, will come in profit & loss a/c under the income side with the sale value of goods.Debtors: Debtors are current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more and will come under the assets side of the balance sheet under existing assets.Bank: Bank balance is also a current asset. Therefore, it will show under the assets side of the balance sheet under existing assets. On the receipt of customer payment, the bank amount will increase, whereas debtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion.
  • read more will decrease. Thus, the total balance of current assets will not remain the same.Discount: Any discount given to the dealer comes under the expenditure side of the profit & loss account, decreasing the company’s profitability.

Advantages

  • They help record the transaction involving the sale of goods on credit by the company appropriately, keeping track of every credit sale involved.With the help of a sales credit journal entry, the company can check the balance due to its customer on any date. In addition, it will help the company monitor the balance outstanding of the customer in case the customer approaches again for credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more.

Limitations

  • If the person recording the transaction commits any mistake, it will show the wrong trade in the company’s books of accounts.When many transactions are involved in the company, recording the sales credit journal entry for every company transaction becomes problematic and time-consuming. It also increases the chances of mistakes by the person involved in such a matter

Important Points

  • When the goods are sold on credit to the buyer, the account receivable account will be debitedDebitedDebit represents either an increase in a company’s expenses or a decline in its revenue. read more, which will lead to an increase in the company’s assets as the amount is received from the third party in the future. Therefore, it leads to the asset creation of the company and is shown in company’s balance sheetBalance Sheet Of The CompanyA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more unless settled.When the goods are sold on credit to the buyer of the goods, the sales account will be credited in the company’s books of accounts. Therefore, it will increase the revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more and reflect in the company’s income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more during the sale period.

Conclusion

Sales credit journal entry is vital for companies that sell their goods on credit. At the time of sales on credit, accounts receivable accounts will be debited, which will be shown in the balance sheet of the company as an asset unless the amount is received against such sales, and the sales account will be credited, which will be shown as revenue in the income statement of the company.

It helps record the transaction involving the sale of goods on credit by the company appropriately, keeping track of every credit sale involved.

This article has been a guide to Sales Credit Journal Entry. Here we discuss the most common example of a journal entry of credit sales along with explanations, advantages, and limitations. You can learn more about accounting from the following articles –

  • Purchase Credit Journal EntryPrepaid Expenses Journal EntryRecord Unearned Revenue Journal EntriesCost of Goods Sold Journal Entry Examples