The credit sales journal entry is an entry in a company’s sales journal which is used to record the sale of goods or services on credit. The major way by which companies generate revenue is through the sale of goods or the provision of services. These goods and services offered could be purchased by clients either with cash or on credit. In the case of a cash sale, the client pays for the good or service immediately upon receipt. For the credit sale, the client pays for the good or service after some time; this is usually in a period of not more than 30 days.
As with all other transactions, when companies sell goods or provide services on credit, they make a journal entry for the sale. When businesses understand how to make the credit sales journal entry, it aids them in making informed decisions about offering or withdrawing the option of purchasing goods and services on credit. It also aids in making better operational decisions and improves the management of finances. Here, our discussion shall focus on how to make the credit sale journal entry, examples, and the advantages and disadvantages of credit sales.
Credit sales explained
When companies offer goods or services to their customers on credit, it is termed credit sales. Credit sales refer to sales that are not paid for immediately upon purchase. These purchases are made by customers based on an agreement between them and the company that offers the goods or provided the service, with the good or service amount owed by the customer to be paid at a later date. Simply, they are purchases with delayed payment. The customer who owes the company for the good or service is called a debtor while the amount owed is considered a current asset called an account receivable.
Credit sales are recorded both on a company’s income statement and on its statement of financial position or balance sheet. On the income statement, it is recorded under revenue along with cash sales as sales. On the balance sheet, it is recorded as accounts receivable signifying that the amount is owed to the company. A lot of retailers use the credit sales option to purchase goods from manufacturers, generate cash when they sell the merchandise, and then pay off the manufacturers from the sale proceeds.
When companies offer credit to customers, the customers receive goods or services from the company without paying for them immediately. As a result, it increases the amount owed to the company by customers. An increase in credit sales shows that more customers are taking advantage of the credit sales that are offered by a company. Companies are careful when extending credit to customers since a failure to pay the amount owed adds to the company’s bad debt. Bad debt refers to all amounts owed to the company by its clients which are considered irrecoverable.
Hence before extending credit to customers, the companies outline the terms of the credit on their invoice. This is done so that the customer that is making the purchase will have a clear knowledge of the conditions upon which the credit has been extended to them.
Terms for credit sales
When companies offer goods or services on credit, they often do so with stipulated conditions for the payment of the amount owed; these conditions are referred to as credit terms. The credit terms of purchases are usually indicated on the invoice of the purchase. It usually indicates when the amount owed is due for payment, any sales discount for the purchase as well as any applicable late payment fees or interest.
The sales discount allows the customer to pay an amount that is lesser than the actual total for their purchase. The sales discount is used to encourage early payment for goods or services received as the discount is often time-bound. If the customer is unable to pay for the good or service within the stipulated time frame, the sales discount becomes forfeited. Companies normally state the condition under which the customer gets a sales discount in the header section of the purchase invoice.
For instance, an invoice that indicates “5/10 net 30” means the customer will receive a 5% discount if the amount owed is paid within 10 days. Otherwise, the customer has to pay the full invoice amount within 30 days from the time of purchase.
Advantages and disadvantages of credit sales
Although a lot of companies prefer cash sales in recent times and even employ different marketing strategies to achieve this, a lot of companies still offer the option for credit purchases and these have some advantages and disadvantages which we shall discuss below:
- Credit sales give customers the flexibility and option of purchasing goods even when they do not have the cash to cover the purchase immediately. Hence customers can make purchases at the moment and pay later when they have the money.
- Companies can attract new customers through credit sales especially when their competitors offer only cash sales. This will aid in boosting the company’s client base.
- Companies could spend a lot of time and resources in retrieving the amounts owed to them from customers. This leads to a waste of time and resources that could otherwise be used more productively towards the company’s growth.
- Credit sales could increase the company’s bad debts. Bad debts are debts that are considered irrecoverable and have to be written off. This mostly occurs when the customer goes bankrupt.
See also: Utilities payable debit or credit?
What is a credit sales journal entry?
A credit sales journal entry refers to the accounting entry made by companies to record transactions that involve the sale of goods or services to customers on credit. The journal entry usually involves a debit to the accounts receivable and a credit to the sales account.
Making this journal entry aids companies in tracking the trend of their customer purchase behavior as a sharp increase in the number of credit sales journal entries indicates that more customers are making purchases from the company on credit. The credit sales journal entry is important because it aids businesses in ensuring that all sales for either goods or services that were made on credit are properly recorded in their financial records.
When companies do not make this journal entry correctly or fail to record such transactions, it could result in being unable to track monies customers owe the company, inaccurate financial reports, and a lack of proper understanding of the company’s revenues.
The journal entry for sales made on credit is usually recorded once the customer has purchased the good or service irrespective of when they pay for the goods or services. This is done based on the accrual accounting method where revenue is recorded once it is earned and not when it is paid. Hence companies need to keep tabs on their accounts receivable, ensuring that the details recorded are correct.
The account receivable records all monies owed to the company by customers who received either goods or services on credit. There are basically two journal entries made to record credit sales; first when the good or service is purchased and then later on when the good or service is paid for. Both of these journal entries are useful when preparing financial statements, forecasting the business’s revenue as well as budgeting for the future.
Making journal entries for credit sales can be quite tasking, this is because the time of the purchase is different from the time of payment. The GAAP matching principle requires that the revenue generated by a company be recorded in the same accounting period as the expense associated with the revenue. Hence understanding how to make the credit sale journal entry is very important.
See also: Is Investment Debit or Credit?
How to make a credit sales journal entry
The credit sales journal entry is an important accounting entry for businesses. It is made using the double-entry bookkeeping method. With this method, transactions are abnormally recorded in two or more accounts simultaneously. These entries generally involve a credit to one or more accounts and a debit to one or more accounts. These entries are normally equal but opposite; thus when one account increases, the other decreases. Additionally, the amounts recorded must be equal to each other; a credit of $10 to an account must be followed by a debit of $10 to another account.
A credit sale journal entry is an accounting transaction used to record the sale of goods or services on credit. It involves a debit to the accounts receivable and a credit to the sales account. It is an especially common journal entry for companies who sell goods on consignment or offer a long payment duration for goods purchased.
For instance, if a company sells consumables to retailers and gets paid say in a month from the time of goods delivery, they will have to record the sale as a credit sale pending when they receive the payment. Additionally, companies that sell products such as cars and give a payment duration of over one year with the customer making installments payments monthly also make the credit sales journal entry for such transactions.
In making the credit sales journal entry, two entries are made. First when the purchase is made and then when the customer pays the amount owed. For the first journal entry, it usually involves a debit to the accounts receivable signifying an increase in the amount owed to the company, and a credit to the sales account as shown in the table below:
If the purchase made is liable to taxation, the sales tax payable account will also be included in the journal entry. Thus three accounts will be involved as shown below:
|Sales tax payable||$$|
The second journal entry involves a debit to cash signifying an increase in the company’s current assets and a credit to the accounts receivable signifying a decrease in the amount owed to the company. The journal entry for the payment will be as follows:
Furthermore, if the credit sale made included a sales discount and the customer made the payment within the stipulated period when the discount is applicable, the journal entry to record the payment will involve an additional account from the one shown in the table above. The additional account is the sales discount account. Making a credit sale journal entry for a sale with an applicable sale discount will be the same as the one in the following table:
There are instances where companies are unable to recover the payments owed to them by customers, when this happens, a journal entry has to be made to write off the debt. This journal entry will involve a debit to the bad debt account and a credit to accounts receivable as follows:
Benefits of making credit sales journal entries
- Credit sales journal entries provide an up-to-date record of all credit sales made by the company.
- It aids the company in keeping track of all amounts owed to them by customers and further makes follow-up for money retrieval easier.
- Businesses can spot the trend of either increasing or declining credit sales through the journal entries made. This will aid them in better understanding how their customers react to credit sales.
- When the credit sales journal entry is accurate, it aids companies in making realistic forecasts about their level of both cash and credit sales. Hence, they can better predict how much revenue they are expected to realize per accounting period.
- One of the journals that auditors look at when auditing companies is the sales journal. Since the credit sale are recorded in this journal, keeping accurate and up-to-date records makes the auditing process easier and less cumbersome.
- Accurate credit sales journal entries for all credit transactions minimize errors for companies who use software for the preparation of their financial statements.
- Filling taxes becomes easier when a company keeps accurate records of its credit sales as this amount when retrieved adds to the overall revenue that is reported by the company. Thus it is a major determining factor in the amount of tax paid.
- The record can give insight into periods of high patronage and those of low patronage. Hence, it can be used to gauge the business’s performance over time.
See also: Is the capital stock a debit or credit?
Credit sales journal entry examples
Let us have a look at how the various credit sales journal entries are actually recorded during the course of the daily operations of companies.
Assuming Tesla sold a car worth $30,000 on credit to Miss. Evelyn on November 14, 2022. If the car has an additional 5% tax attached, Tesla will record the sale as follows:
|Sales tax payable||$6,000|
The $6,000 added to the car purchase price is the applicable 5% tax for the car purchase. Assuming Mrs. Evelyn completes the car payment on November 30, 2022, but the company has not remitted the tax to the government, Tesla will make a new journal entry to record the payment as follows:
|Sales tax payable||$6,000|
Suppose Coca-cola sold beverages to Mr. Stephen on November 28, 2022. The beverages cost $50,000 but they were delivered to him on credit. If the invoice has 5/7 net 30 as its payment terms, Coca-cola will record the purchase as follows:
If Mr. Stephen pays for the beverages on December 4, 2022, it means that his payment was made within the sales discount timeframe. Thus, based on the invoice terms, he gets to pay 5% lesser than the invoice amount due to his early payment. Coca-cola will then record his payment as seen below:
In a situation where Mr. Stephen is unable to make the payment within the 7-day period when the discount is applicable, he would have to pay the full amount for the purchase. Hence if he made the payment on December 27, 2022, the journal entry to record the transaction will be as follows:
Assuming Finacial falconet sold 5 laptops to Jotscroll media company on October 12, 2022. If each laptop costs $87 and the purchase was made on credit. To find out the total amount that Jotscroll Media Company owes Financial Falconet, we will multiply the cost of one laptop by the number of laptops sold. This will be $87 x 5 = $435. This means that Jotscroll Media Company owes Financial Falconet $435. The credit sale journal entry to record the transaction will be as shown in the table below:
In a situation where Jotscroll Media Company goes bankrupt on November 1, 2022, and it has not paid Financial Falconet for the purchase of the laptop, it means the debt has to be written off as bad debt by Financial Falconet since they will not be able to retrieve the money. Journal entry to record the bad debt will be as shown in the table below:
Assuming Miss. Grace purchased goods worth $8,900 from Amazon on credit. If the purchase was made on November 24, 20022. Amazon will record this transaction as follows:
Assuming Miss. Grace clears up her debt on December 23, 2022, Amazon will record the payment as follows:
See also: Salaries expense debit or credit?
Creating a credit sales journal entry usually involves a debit to the account receivable and a debit to the sales account. Upon payment of the debt, the journal entry to record the payment will vary based on whether the purchase is liable to taxation or whether the customer received a sales discount and paid within the discount period. Companies are wary of offering credit sales options to customers as it adds to their bad debt in a situation where the debt becomes irrecoverable either because the purchaser went bankrupt or died in the case of individuals.
Businesses use the credit sales journal entry to keep track of credit sales which ensures that errors are avoided when trying to retrieve these debts and that the company’s financial statements are accurate. It further aids the company management in making the right operational decisions, aids in budgeting, forecasting, and future planning of the company’s finances.
Although the process of recording credit sales might seem a bit daunting, constant practice of accurately recording it enhances one’s skill and makes it easier to handle. One important point to note when making the credit sales journal entry is that the amount debited and credited must be equal to ensure that the record is accurate and balanced.
Furthermore, making accurate credit sales journal entry for every credit sale transaction aid in measuring the company’s performance, tracking the trend of customer purchase patterns, identifying areas of improvement, complying with the accounting standards of credit bookkeeping, and accurately calculating the company’s tax liability.