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:
- Did the buyer pay with cash or with credit?
- Did the seller provide a good or a service?
- 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:
- The buyer paid in cash.
- There is no sales tax in this state.
- The seller charged $310 for his offering.
- The service being offered was well appreciated.
What are the seller's journal entries for this transaction?
Answer:
-
Journal Entries for the Sale Cash $310.00 Sales Revenue $310.00
Explanation:
- The buyer bought with cash.
INCREASE CASH BY $310, INCREASE SALES REVENUE BY $310 - The transaction is not taxable, so no need to worry about sales taxes.
- Since the vendor sold a service, we don't need to worry about COGS and Inventory.