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Tracking your credit sales is important if you are a business owner. The process of recording credit sales in a journal entry is simple and can be completed in a few steps. We will discuss how to record a credit sale in your journal and account for it properly in this blog post. Read on to find out more.
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What is a Credit Sales Journal Entry?
When the company sells any merchandise to a third party on credit, a sales credit journal entry is made and is kept in the company’s sales journal. In this scenario, the credit to the sales account is equal to the debit to the debtor’s account or account receivable account.
Sales made on credit increase the buyer’s inventory while also giving them adequate time to sell the item and pay their supplier. This credit period is often chosen well in advance and may differ by industry. Penalties or legal action against the defaulter may also result from failure to pay on time.
Key Features of Sales Credit Journal Entry
- When a business sells inventory to a customer on credit, the transaction is recorded as a sales credit journal entry in the business’ sales journal.
- Companies who sell their goods on credit must prioritize this.
- When a corporation makes a credit sale, the accounts receivable account is debited and displayed as an asset on the balance sheet of the business until the money is actually paid for the sale and the sales account is credited. In the company’s income statement, it is shown as revenue.
- It is vital to keep track of the transactions that involve the company selling items on credit.
Detail of Sales Credit Journal Entry
For businesses that offer their products on credit, sales credit journal entry is essential. When a sale is made with a credit card, the accounts receivable account will be debited and, unless the money is received to cover the sale, will be shown as an asset on the company’s balance sheet. The sales account, meanwhile, will be credited and, in the income statement of the business, will be shown as revenue.
It assists in properly documenting the transaction involving the company’s sale of products on credit and keeps track of each associated credit sale.
When products are sold to a customer on credit, the account receivable is debited, which increases the company’s assets as money is eventually paid by the third party. Thus, unless settled, it results in the formation of assets for the company and is shown on the balance sheet.
When the buyer of the products accepts the goods on credit, the sales account will be credited to the business’s books of accounts. As a result, it will boost revenue and show up in the company’s income statement during the selling period.
How to Record a Sales Credit Journal Entry?
A sales credit journal entry record enables businesses to credit the relevant account with the amount due and the specifics of the transaction. Before the start of a financial or assessment period, the technique of documentation is established, and it is followed to prevent confusion in the organization’s recordkeeping system.
When products are sold to a customer on credit, the account receivable is debited, increasing the company’s assets as money is due from the buyer. The sales account will receive the matching credit, which will boost the business’s revenue. The following is the entry to document the sales made on credit:
| Particulars | Dr ($) | Cr ($) |
|---|---|---|
| Accounts Receivables A/C…..Dr | XXXX | |
| To Sales A/C | XXXX |
The cash accounts will be credited when the company receives the cash against the items sold on credit because the money has been received against the goods sold on credit. Since the account was initially debited at the time of the sale of the products and will be credited once the money is received, there will be a matching credit in the receivable accounts. The following is the entry to record the receipt against the purchases made on credit:
| Particulars | Dr ($) | Cr ($) |
|---|---|---|
| Cash A/C…….Dr | XXXX | |
| To Aoounts Receivable A/C | XXXX |
Examples of Sales Credit Journal Entry
With the aid of a few instances, let’s learn how businesses keep track of sales credit log entries.
Example 1#
Apple Inc., a retailer of laptops and computers, gave Jimmy Electronics credit for $50,000 worth of items on May 1, 2020. It has a fifteen-day credit term. It indicates that Jimmy Electronics must pay by May 30, 2020, or earlier.
The diary entries from Apple Inc.’s books are listed below:
Example 2#
Apple Inc. offers early payment or cash reductions. In the aforementioned illustration, Apple Inc. is providing a 10% discount to Jimmy Electronics if they pay by May 10 or earlier. Jimmy Electronics accordingly paid the invoice on May 10, 2020.
The diary entries from Apple Inc.’s books are listed below:
Example 3#
As shown in the previous example, Jimmy Electronics failed to pay by May 30, 2020, and the company filed for bankruptcy. Additionally, Apple Inc. thinks the current loan is a bad debt because it cannot be recovered.
The diary entries from Apple Inc.’s books are listed below:
When the fiscal year comes to a conclusion, Jimmy Electronics will pass access for bad debt.
Example 4#
On 31st April 2020, ABC Inc. sold XYZ Inc. products worth $1,000 that are subject to a 10% tax. XYZ Inc. will pay ABC Inc. in two equal installments.
The entries listed below will be recorded in ABC Inc.’s books:
At the time of Credit Sales
Assumed to be $1,000 in the example above is the basic value of the products. Because of this, we have added a 10% tax to the value, which ABC Inc. will collect from XYZ Inc. and pay to the government. Additionally, ABC Inc. is allowed to take an input credit of the same amount and request a refund from the government.
At the time of receiving the first payment:
Example 5#
For instance, firm A Ltd. deals in the sale of various products on the market. It made a credit sale of $100,000 worth of items to one of its customers on November 1st. The buyer chose to make a complete payment in exchange for the products when they were sold and were delivered after 15 days. The full payment was paid to the business by the consumer on November 15, 2020. How will the business now record the sales of products made on credit and the cash received in exchange for those sales in the journal?
Solution
The account receivable account will be debited with the matching credit to the sales account on November 1, 2020, when the company sells the products to the buyer on credit. So, the following is the entry to document the sales made on credit:
The cash accounts will be credited on November 15, 2020, when the consumer pays the full amount in cash to the business in exchange for the goods sold on credit on November 1, 2020, and the accounts receivable accounts will receive the matching credit. The following is the entry to record the receipt against the purchases made on credit:
How to Show Credit Sales in Financial Statements?
Now that we know how to do it, let’s look at some financial statements.
- Credit Sales: Sales are recorded in the revenue side of the profit and loss account with the sale value of the items, regardless of whether they are made in cash or on credit.
- Debtors: Debtors are current assets and are listed on the balance sheet’s assets side under existing assets.
- Bank: A bank’s balance is a current asset as well. As a result, it will appear in the section labeled “Existing Assets” on the balance sheet’s assets side. Following the receipt of client payment, the bank balance will rise while the number of debtors will fall. The overall balance of current assets will change as a result.
- Discounts: Any discounts granted to dealers are recorded as expenses on the profit & loss sheet, which lowers their profitability.
Advantages of Credit Sales in Financial Statements
Let’s talk about the benefits of businesses postponing their cash flow through credit sales and how journal entries support their ability to keep track of the quantity of receivables.
- They assist in accurately recording the transaction involving the sale of goods by the company on credit while keeping track of each credit sale involved.
- The business can check the sum owed to its customers at any time with the aid of a sales credit log entry. It will also make it easier for the business to keep track of the customer’s outstanding balance in case they request credit again.
Disadvantages of Credit Sales in Financial Statements
Despite the benefits mentioned above, some variables on the opposite end of the spectrum can be a hassle or obstacle for organizations. Discussing the drawbacks from the explanation below will help us comprehend.
If the person who records the transaction makes a mistake, the incorrect deal will appear in the company’s books of accounts.
Recording the sales credit journal entry for each business transaction can be difficult and time-consuming when there are numerous transactions taking place. It also raises the likelihood that the person concerned in such an issue may make blunders.
Conclusion
We hope that now you understand that a sales credit journal entry is an important accounting activity that documents the cancellation of a sale, frequently as a result of returns, refunds, or allowances. By reporting revisions to income and accounts receivable, it ensures transparency and complies with accounting rules, assisting in maintaining accurate financial records. Businesses must properly record sales credits in order to track their financial success and safeguard the accuracy of their financial statements.
The return of products or services by customers results in a fall in revenue, an increase in accounts receivable, or a decrease in accounts payable, depending on whether a refund is given. A sales credit journal entry is a crucial accounting record used to track this. For correct financial reporting and to keep the books of the firm open, these transactions must be properly recorded.
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Frequently Asked Questions
What does a Credit Sale Double Entry mean?
Credit sales are monitored by double entry bookkeeping. A company’s finances must reflect a balance between credits and debits. When performing double-entry accounting, one needs additionally to track five different kinds of accounts.
What does a Credit Sales Journal Entry for GST Entail?
Purchase transactions, sales transactions, input credit offsets against GST liabilities, reverse charge transactions, refunds (export of goods and services), and imports are only a few of the items that make up the GST journal entry.
What does the Accounting Entry Look like for Credit Sales with a Discount?
In the income statement, the credit sales with discounts are immediately subtracted from the gross sales. It denotes that sales discounts, cash discounts, and trade discounts are not included in the value of sales recorded in the income statement.
How Should a Credit Sale Journal Entry be Completed?
The sale date, the buyer’s name, the purchase price, and the amount owed by the buyer must all be included in the sales credit log entry.
Where are Sales Tracked for Journal Credits?
All credit sales made by the business are recorded in the sales diary. These sales are often made up of inventory or other product sales. You’ll notice that the sales notebook only lists credit sales for inventories and products.
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