Journal Entries for a Sale

Business exist for one purpose, and one purpose only: to make a profit.

Most companies doe this by selling goods or services.

For this reason, it's absolutely critical to understand what the journal entries look like when a firm makes a sale.

Before you start, it's a great idea to ask yourself three questions about the transaction:

1. Did the buyer pay with cash or with credit?
2. Did the seller provide a good or a service?
3. Did the seller collect sales tax?

Once you have these three questions answered, you have all of the information you need to create the journal entries for a basic sale. Let's take a look at all of the possibilities:

Question 1: Did the buyer pay with cash or credit?

• If the buyer used cash, increase cash and increase sales revenue.
• If the buyer used credit, we increase accounts receivable and increase sales revenue.

Question 2: Did the seller provide a good or service?

• If the seller provided a good, increase our cost of goods sold and decrease our inventory.
• If the seller provided a service, there's no need to do anything.

Question 3: Did the seller collect sales tax?

• If the seller collected sales tax, we increase the cash or accounts receivable (depending upon how the buyer paid) and increase the sales tax payable (a liability).
• If the seller didn't collect sales tax, there's no need to do anything.

👉 Answer:

👨‍🎓 This is how we solve it:

1. The buyer bought on credit.
   INCREASE ACCOUNTS RECEIVABLE BY $300, DECREASE SALES REVENUE BY $300
2. The transaction is taxable. The debit to accounts receivable is normally combined with the debit for the actual purchase price.
   INCREASE ACCOUNTS RECEIVABLE BY $12, INCREASE SALES TAX PAYABLE BY $12.
3. Since the vendor sold a service, we don't need to worry about COGS and Inventory.