Journal Entries for a Sale

Lesson:

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.
Pepper corp. just reported a large sale that need to be journalized.

This is what you've been told:

  • This was a cash purchase.
  • The price for the purchase was $200.
  • State law requires the collection of $12 in sales tax on this sale.
  • The purchased product was the last of its kind and had a COGS of $21.
What journal entries should the seller make?

Answer:

  • Journal Entries for the Sale
    Cash     $212.00    
         Sales Revenue     $200.00    
         Sales Tax Payable     $12.00    
    Cost of Goods Sold     $21.00    
         Inventory     $21.00    

Explanation:

  1. The buyer bought with cash.
    INCREASE CASH BY $200, INCREASE SALES REVENUE BY $200
  2. The transaction is taxable. The debit to cash is normally combined with the debit for the actual purchase price.
    INCREASE CASH BY $12, INCREASE SALES TAX PAYABLE BY $12.
  3. Since the vendor sold a product, we need to worry about COGS and inventory.
    INCREASE COGS BY $21, DECREASE INVENTORY BY $21
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