Companies generally operate to meet a need and make a profit in the process. In order for either of these to happen, the company produces goods or renders services to its customers in exchange for payment. When this payment is made immediately after the good or service is received, it is termed a cash sale and the company usually makes a journal entry to record a such transaction. Hence understanding the cash sales journal entry is important for businesses as it enables them to keep an accurate record of all cash sales transactions; this helps with having accurate financial statements in the long run.
The cash received from the sales of goods or services is usually recorded as sales under the revenue section of the income statement and is also reported as cash under the current assets section of the company’s balance sheet. In this article, we will learn how to make cash sales journal entry. But before then, let us understand what cash sales are and the accounting standards for a journal entry.
Understanding cash sales and journal entry
What are cash sales?
Cash sales refer to the immediate cash income a company earns from the sale of goods, services, or both. It is a sales transaction that involves the company receiving cash from a customer once the customer purchases goods or receives a service. Hence the payment for the good or service is said to be on the spot.
With the various technological advancements in payment options and the global presence of a lot of businesses, cash sales have evolved to not only mean the sales payment received in hard dollar currencies but also include:
- Bank transfers
- Cryptocurrency payments
- Digital payment options
- Prepaid or credit card purchases
- All other payment methods that are accepted by the company that sold the goods or rendered the service.
Therefore, for all payments that companies receive for goods or services immediately when the good or service is received by a customer, such a transaction is classified as a cash sale.
Companies especially prefer receiving cash payments for the goods and services they offer because the cash received, immediately adds to their current asset account (cash account). It also eliminates the need of extending credit to the customer which further cancels out the need to offer a sales discount. Additionally, cash sales mitigate the risk of accumulating bad debt which is a common phenomenon that is associated with credit sales. Bad debt refers to all accounts receivable that the company deems as uncollectible.
Furthermore, since cash sales involve immediate payment by the customer, the company does not have to waste time and resources in the bid of retrieving the money the customer owes for the goods or services that they have received. The company also gets to settle and record the transaction at once, without having to make adjusting entries for when the payment is received as is common with credit sales.
What is a journal entry?
A journal entry is a record made to keep track of the various business transactions that take place in a company. This is usually recorded in the company’s general ledger. However, it may sometimes be recorded in a subsidiary ledger before it is summarized and forwarded into the company’s general ledger. The general ledger is then used when making financial statements of the company which include the income statement, statement of cash flows, and statement of financial position.
Journal entries are made based on the accounting credit and debit rules. Based on these rules, there is usually an equal but opposite debit for every credit entry made into a journal. This is known as the double-entry bookkeeping system and usually involves two accounts. However, there are instances where the journal entry may require more than two accounts. Irrespective of the number of accounts involved in a journal entry, the total amount of debit must be equal to the total amount of credit made. This is done to sure that the transaction recorded is balanced and accurate.
For the cash sales journal entry, it usually involves a debit to the cash account and a credit to the sales account. In a situation where the company wants to make a more detailed report of the cash sales for goods sold, it will involve five accounts, the cash account, cost of goods sold, sales revenue, inventory, and sales tax payable accounts. Making a journal entry to record the details of a service rendered involves the cash, service revenue, and tax payable accounts. We will discuss the cash sales journal entry in detail below.
Cash sales journal entries
The major reason for making a cash sale journal entry is to keep track of all the cash coming into a company from the goods and services they offer customers. In making a cash sale journal entry, it basically involves:
- A header line for the various fields to be inputted.
- The first column indicates the date of the transaction.
- The second column includes the accounts that will be involved in the transaction.
- The third column contains the debit amounts made.
- The fourth column involves credit amounts made.
Therefore, a typical cash sale journal entry will look like the one shown below:
In a situation where the sale made is liable to taxation, the cash sale journal entry will look like the following table:
|Sales tax payable||$$|
The table above gives a simplistic view of what a cash sale journal entry would look like. However, when a company wants to make a more detailed cash sale journal entry, it should capture: the sale made and the cash received, the reduction in the company’s inventory as a result of the sale if it was for goods, and the tax liability if the sale is liable to tax payment. Let us look at the various journal entries for goods sold and services rendered.
Cash sales journal entry for goods
- Journal entry for goods sold without a tax liability
- Journal entry for goods sold that are liable to taxation
When a company receives instant payment for the goods sold and wants to make a detailed journal entry for the transaction, it would involve four or five accounts depending on whether or not the sale is liable to taxation. These accounts are the cash, cost of goods sold, sales revenue, inventory, and sale tax payable accounts.
The cash and cost of goods sold accounts are debited while the sales revenue, inventory, and sales tax payable accounts are credited. The debit to the cash and cost of goods sold account signifies an increase in the balance of the accounts. This is because there is an increase in the amount of cash due to the cash received and an increase in expense since the goods have been transferred to the customer.
The credit to the sales revenue account indicates an increase in the amount of revenue. The credit to inventory indicates a decrease in the company’s inventory due to the transfer of good ownership. The credit to sales tax payable indicates an increase in the amount of tax that will be remitted to the government.
The cash sale journal entry for the sale of goods will be as follows:
Journal entry for goods sold without a tax liability
|Cost of goods sold||$$|
Journal entry for goods sold that are liable to taxation
If the good sold includes a tax payment due to the government, it will be recorded as follows:
|Cost of goods sold||$$|
|Sales tax payable||$$|
Cash sales journal entry for services rendered
- Journal entry for services rendered without a tax liability
- Journal entry for services rendered that are liable to taxation
When companies render services to clients and these clients pay in cash, the cash sales journal entry to record the details for a service rendered involves two or three accounts depending on whether taxes will be paid for the service. If tax will not be paid, the journal entry will involve the cash and service revenue accounts. If tax will be paid for the service, the journal entry will involve the cash, service revenue and tax payable accounts.
The cash account is debited while the service revenue and tax payable accounts are credited. The debit to the cash account indicates an increase in the balance of the cash account and the company’s current assets while the credit to the service revenue and tax payable account indicates an increase in the amount of revenue the company has and an increase in the amount of tax that will be remitted to the government respectively.
Journal entry for services rendered without a tax liability
The cash sales journal entry for a service provided that is not liable to taxation is as shown in the following table:
Journal entry for services rendered that are liable to taxation
When the service rendered requires a tax payment, then the journal entry to record the transaction will be as follows:
Cash sales journal entry examples
Now that we have understood how a cash sales journal entry should be made for either goods sold or services rendered, let us look at some examples of how various businesses can make a cash sale journal entry.
Cash sales journal entry example 1
Assuming Mr. Micheal took his car to have his engine oil changed on November 11, 2022. If he bought the engine oil for $20 from the mechanic who will change the engine oil and paid an additional $10 for the mechanic’s service of changing the engine oil. If Mr. Micheal paid in cash for both the engine oil and the service rendered, then the mechanic will make two different cash sales journal entries to record the transactions.
Assuming the mechanic spent $15 to purchase the engine oil from the manufacturers, the cash sale journal entry to record the engine oil sale will be as shown in the table below:
|Cost of goods sold||$15|
In the above table, the $15 debited from the cost of goods sold account and credited to the inventory account indicates the cost price at which the engine oil was initially purchased by the mechanic before he sold it to Mr. Micheal for $20. The equal but opposite debit and credit to the cost of goods sold and the inventory account cancel out each other.
For the service rendered, the mechanic will record the transaction as follows:
In a situation where the mechanic does not want to make separate journal entries for the engine oil sale and the service of changing the oil, he can decide to make one cash sale journal entry to record the two transactions as one. The combined journal entry can be made in two different ways as shown below:
If the mechanic decided to make the combined cash sale journal entry more elaborate and detailed, it will be as shown in the following table:
|Cost of goods sold||$15|
Note that when combining the cash sale journal entry for both goods sold and services rendered, instead of crediting the sales revenue or service revenue accounts, the combined revenue that has been generated is simply recorded to the sales account.
Cash sales journal entry example 2
Assuming a clothing retailer Mrs. Heidy makes a bulk purchase of a thousand dark denim jeans from the clothing brand, Good American at the rate of $78 per piece and an additional 5% sales tax on February 17, 2022. Suppose she paid the total cost of the dark denim as well as the applicable sale tax to Good American for her purchase via a bank transfer immediately. In order for us to know how much she paid for the purchase we will multiply the price of each dark denim by the total number of dark denim she purchase. We will also calculate the applicable sales tax for her purchase.
Cost of denims = $78 x 1,000 = $78,000
Sales tax = $78,000 x 5% = 3,900
This means Mrs. Heidy’s total purchase amounts to $81,900. If the cost of producing one dark denim jean is $60, it means the cost of goods sold is $60 x 1,000 or $60,000. Since Mrs. Heidy paid for the dark denim jeans immediately at purchase, Good American will make a cash sales journal entry for her purchase as follows:
|Cost of goods sold||$60,000|
|Sales tax payable||$3,900|
From the table above, we can see that the bank transfer made by Mrs. Heidy was recorded as a cash sale that was debited to the cash account. This is because although she did not pay for the dark denim jeans using hard cash, the fact that she made the payment immediately at purchase makes the transaction a cash sale.
Although some companies may record the sale as a debit to their bank account instead of the cash account, most companies prefer to record it to the cash account as shown above. They do so to keep the journal entry simple and based on the fact that the increase in the company’s bank account balance also means an increase in its cash or current assets.
Cash sales journal entry example 3
If Miss. Caroline owns a house cleaning firm and her service was contracted by Mr. Billy on October 31 2022 for the cleaning of his house. If Miss. Caroline charges $39 per hour of cleaning and it took her 4 hours to clean Mr. Billy’s house, which means her payment will be $39 x 4. Assuming Mr.Billy paid her the bill when she finished cleaning his house, Mrs. Caroline will record the payment she received by making a cash sale journal entry similar to the one below:
Since Mrs. Croline charges $39 per hour and she spent 4 hours cleaning Mr. Billy’s house, the amount recorded is $39 x 4 which is equal to the $159 recorded in the cash sales journal entry.
Cash sales journal entry example 4
Assuming Rite bite is a restaurant that sells various delicacies in their restaurant and also makes deliveries to customers who make orders outside the restaurant but with an added delivery fee. Suppose at the close of business on August 16, 2022, they realized $10,000 for the meals sold both within and outside their primary place of business and they charged a total of $500 for the meal deliveries made.
If the total amount spent by Rite bite for preparing the meals sold is $6,500. The cash sales journal entry to record the revenue generated for the meals sold and the delivery fees received will be as shown in the two tables below:
Cash sales journal entry for meals sold
|Cost of goods sold||$6,500|
Cash sales journal entry for delivery fees received
Cash sales journal entry example five
Assuming James & Hardy is a law firm that provides various consultancy services and legal representation for their clients. Suppose their consultancy services cost $200, an additional 7% tax charge and they require full payment after each consultancy session. If the total number of consultation services rendered by the firm’s team of lawyers by the end of the day, November 11, 2022, is 30.
The total amount they received for consultation will be $200 x 30 = $6,000
The tax charged will amount to $6,000 x 7% = $420
This means the total amount of cash received by the law firm is $6,420
Since all the clients paid both the consultation fees as well as the tax charges immediately upon completion of the consultancy session, It means that James & Hardy will record the amount earned from the service rendered as a cash sale. The journal entry for the consultations will be as follows:
|Sales tax payable||$420|
See also: Is Investment Debit or Credit?
The cash sales journal entry is one of the most common journal entries made daily by various businesses, this is because most of the goods and services bought by individuals or corporate organizations are paid for with cheques, bank transfers, or hard cash which all qualify to be recorded as cash sales since these payments are made at the point of purchase.
Hence the cash sales journal entry records cash payments whether they are made with dollar notes or through other payment modes provided the payment is immediate. Cash sales in its most simplest form involve a debit to the cash account and a credit to the sales account. A copy of the case sales journal entry is usually printed and kept in a binder with other materials attached to explicitly show what was involved in the particular transaction. This journal entry information is sometimes accessed by external auditors when analyzing a company’s financial statements.