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.
Ultra Biz just reported a large sale that need to be journalized.

Here's what you know:

  • This offering's sales tax is $6.
  • This buyer chose to make the purchase on credit.
  • The buyer was pleased with his purchased products which had a COGS of $22.
  • The buyer and seller agreed on a price of $110.
What are the seller's journal entries for this transaction?

Answer:

  • Journal Entries for the Sale
    Accounts Receivable     $116.00    
         Sales Revenue     $110.00    
         Sales Tax Payable     $6.00    
    Cost of Goods Sold     $22.00    
         Inventory     $22.00    

Explanation:

  1. The buyer bought on credit.
    INCREASE ACCOUNTS RECEIVABLE BY $110, DECREASE SALES REVENUE BY $110
  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 $6, INCREASE SALES TAX PAYABLE BY $6.
  3. Since the vendor sold a product, we need to worry about COGS and inventory.
    INCREASE COGS BY $22, DECREASE INVENTORY BY $22
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