Journal Entries for Credit Sales
Credit sales refer to the purchases that the customers make with delayed payment. As the customers do not need to make the payment immediately after the purchase, they can generate cash by using the merchandise they bought so that they can pay the seller. Hence, reasonable payment terms enable the customers to buy more goods or merchandise.
Accounting for credit sales can be quite complicated sometimes as the timing of providing the goods or services is different from the timing the company receives payment from the customer. To ensure accurate entries and accounting treatment, business owners may consider engaging a bookkeeping firm in Singapore and let the professionals help them. This prevents the business owners from messing up the books of accounts of their business. Also, with the help of the experts, they do not need to spend much time on accounting-related tasks too.
When the company has made a sale to its customer on credit, it should record journal entries for credit sales in the sales journal. To record such transactions, the accountants will debit the accounts receivable (Also see Differentiating Between A Company’s Accounts Receivable and Accounts Payable) account or the debtor account and credit the sales account. When the accounts receivable account is debited, the company’s asset will increase. This is because the company will receive that amount in the future, and there is a corresponding credit in the sales account. As a result, the revenue of the company will increase.
When the company receives cash for the credit sale, the company will debit the cash account due to the receipt of cash for the goods that it has sold on credit. Then, it should credit the accounts receivable account as it had debited the account when the sales were made, and thus, it should credit this account when the customer has made the payment.
Now, how should the company show the accounts receivable or debtors, credit sales and bank balance in its financial statements (Also see 4 Things About Financial Statements Every Business Owner Should Know)? As the accounts receivable or debtors are the company’s current assets, this item will appear in its balance sheet in the asset section under current assets. For all sales that the company has made, no matter the sales were made by cash or on credit, the company should record the selling price of the goods in its profit and loss account under the income section. On the other hand, bank balance will appear in the company’s balance sheet under the asset section (Also see Accounting – Balance Sheet – Asset Accounts) as one of the current assets too.
In conclusion, journal entries for credit sales play a crucial role in recording the transactions regarding the credit sales that the company has made. With the help of these entries, the company will be able to trace the outstanding balances that its customers have not paid on any date. Hence, it will be able to check the balances due to the customers if they ask for credit sales from the company again.