Making a sale is what the business usually is about – you sell things or services to earn your living. That’s what you’re expected and supposed to do when you’re in business. Now, there’s also this thing called accounting for the sale obviously.
Again, to start off, if you were living 100 years back and would own a shop for an example, you just charge customers money for the sale and put the money into your till. That’s your sale and your revenue. From the funds in the till you purchase more goods and charge your customers again when they make a purchase in your store.
Although nowadays in stores the system hasn’t changed much, you’re still expected to do something extra – you’re expected to account for your sales. Now I wont go over why it’s important not just for someone else but you so let’s move onto the accounting entries now shall we?
Your accounting entry in case a sale is made, should be something like this:
(1) Debit (2) Account receivables / (3) Cash
(4) Credit (5) Sales revenue
And in case you’re selling goods, the additional entry with every sale made is as follows:
(6) Debit (7) Cost of goods sold
(8) Credit (9) Inventory
Let me explain now what this accounting entry is about.
(1) You just made a sale and hence it’s expected you got an asset – hence the debit entry that’s about to increase your assets. Now note here that the asset can be in two forms – cash that you can use right away or receivable balance that’s still to be collected.
(2) Account receivable is something that you still have to work on in real life – you’ve got to ensure your client pays up their debt. Normally you’d expect no problems and as such there isn’t much to be done initially with it. Just wait until the payment is due and account for the payment. In case they are late, make sure you contact them and let them know you’re not leaving it just like that. But besides that the logic behind this receivable is the opposite when you’re owing to your suppliers. You made a sale, but your client is going to pay at a later date. You’re still accounting for the revenue and the receivable balance against it. It’s still your asset; just it’s a “receivable”. I think the name itself says it all.
(3) The other form as we mentioned is cash. It’s easy and simple. You sell something and you get paid for it right away. Nothing more to it. You account for the sale and the benefits received.
(4) Since there cannot be a debit without a credit, there’s something we should put onto the credit side with the “I made a sale” entry. When we’re putting expenses onto the income statement with a debit entry than consequently all revenue and income is credits. It’s something we’ll explain further on when we talk about statements and then describe how the balance sheet works, but for this lets just say that revenue is on the credit side.
(5) The most important line some people would say – sales revenue! You made a sale and obviously you should account for it. Doesn’t really matter by which means you’re getting paid – right away or later on – you made a sale and you should show it on your income statement.
(6) As we mentioned earlier, with debits you charge expenses onto the income statement. With buying inventory it’s not your expense at the time of the purchase, but at the time of the sale of the item.
(7) Cost of goods sold is as the name says, expense of those goods that you had previously bought and that you’re now charging into expenses since you sold them. They were your assets before the sale, but with selling them you don’t own them and hence they are expensed. Note here that with every sale made there should be corresponding expense recognized as well (unless there isn’t an expense like for real, for an example if you’re selling advertising space on the outer walls of your shop).
(8) When the debit side of this additional entry was expense onto the income statement then there’s bound to be this something we’re putting into expenses. In our case we’re selling our inventory hence we’re crediting our assets.
(9) Something that very often gets forgotten is crediting the inventory balance. You made a sale, you account for the cash received or the receivable balance, but the inventory is something that should be done in addition – you sold something from your assets hence you should show that you don’t own this asset any longer. Something I’d suggest from personal experience is making those entries, both sale and the expense entry together. Always.
Making a sale is the most important thing you do in your business. Without it you would not have a business. It’s the accounting entry your bound to do and hopefully pretty often. As a result I strongly recommend making it so that alongside with your revenue entry you’re also charging for the expenses made for the sale, namely the goods sold with this particular sale. It’s so easy to forget this at the start at least, trust me.