Is sales revenue debit or credit? Sales revenue is the income that a business generates from the sale of its goods or the provision of its services related to the primary operations of the business. It is also known as revenue or sales which is reported annually, quarterly or monthly in the business’s income statement (Profit & Loss Account). It is the very first line item available in the income statement and is referred to as the top-line figure.
The term ‘sales revenue’ and ‘revenue’ are usually used interchangeably. Sales revenue is the income that is generated from the sales of products and services. Therefore, in accounting, it is calculated by multiplying the number of units sold by the average sales price per unit of that item or calculated by multiplying the number of customers by the average price of services related to the primary operations of the business.
At the end of the accounting year, the credit balance of all revenue accounts is usually closed and then transferred to the owner’s capital account or retained earnings (shareholder’s equity), thus increasing the business owner’s equity. This means that sales revenue is responsible for an increase in the normal credit balance of equity. Hence, sales revenue will be entered not as a debit but as a credit.
In this article, we will discuss sales revenue, debit, credit and journal entries to show how sales revenue is recorded in a double-entry accounting system.
Related: Is Capital Debit or Credit?
What is sales revenue?
Sales revenue is the revenue that is generated from a company’s product sales or provided services. In other words, sales revenue measures the income that is brought in through the company’s core business activities. Sales revenue is also known as sales or revenue on the income statement which is listed as a topline figure.
The company’s net income which is known as the bottom line figure is calculated by subtracting expenses from revenue. When revenues exceed expenses, profit is made but when expenses exceed revenue, there will be a loss recorded.
The company’s Gross Sales Revenue includes all receipts and billings from the sale of goods or services and would not include any subtractions for sales returns and allowances. It is the one that is reported at the top of the income statement. The Net Sales Revenue, on the other hand, is derived by subtracting sales returns and allowances from the gross sales revenue figure. This amount represents the amount of cash that a business receives from its customers, especially when it is experiencing substantial amounts of returns.
According to the generally accepted accounting principles (GAAP), sales revenue is recognized on the income statement for the month in which the product or service was sold or fulfilled. Hence, based on the rules established by a government or government agency or based on particular standard accounting practice, sales revenue is calculated in different ways. The cash basis accounting and accrual basis accounting are the two common accounting methods. They, however, do not use the same process to measure sales revenue.
For accrual accounting, the sales that are made on credit are also included as sales revenue for goods or services delivered to the customer. The sales revenue under this accounting rule is therefore recognized even if payment has not yet been received. Cash basis accounting, on the other hand, will only recognize sales as sales revenue when payment has been received.
When there is an exchange of goods or services for cash, the cash that has been paid to the company from the sale is known as a receipt. Hence, it is possible for the company to have receipts without earning sales revenue. A typical instance is when a customer makes a prepayment for a good or service in advance that has not yet been delivered or rendered. Such an instance would lead to a receipt but not an earned sales revenue.
Sales revenue is calculated by multiplying the number of products sold or services rendered by the price per unit. The sales revenue formula will therefore depend on the core business activities. For product-based businesses, the number of units sold and the average price per unit is considered. Therefore, the formula used to calculate sales revenue would be expressed as:
Number of sold units x Average price per unit
For example, a business that sells 400 mattresses per quarter for an average selling price of $800, would calculate its sales revenue as:
400 x $800 = $320,000 Sales Revenue
For service-based businesses, the number of customers attended to and the average price of services are considered when calculating sales revenue. Therefore, the formula for Sales Revenue would be expressed as:
Number of customers x Average price of services rendered
For example, a business consultancy that served 15 clients at an average rate of $8,000 per quarter, would calculate its sales revenue as:
15 x $8,000 = $120,000 sales revenue
Furthermore, companies increase their sales revenues and reduce expenses in order to increase profits and earnings per share (EPS) for their shareholders. When evaluating the health of a business, investors normally consider the company’s sales revenue and net income separately. This is because the net income of a company can grow while its revenues remain stagnant due to cost-cutting.
Now that we have an understanding of sales revenue in accounting; is sales revenue a debit or credit entry? As said earlier, sales revenue is responsible for an increase in the normal credit balance of equity. This means that sales revenue will be entered not as a debit but as a credit. Let’s look at what debit and credit mean to have a proper understanding of what this means.
See also: Service revenue is what type of account?
The double-entry system (Debit and Credit)
In business, every transaction has a monetary impact on the company’s financial statements. When accounting in business, the numbers from business proceedings are recorded in at least two accounts, under the debit and credit columns. In bookkeeping, at least one account must be debited and one must be credited in order to balance the entry. That is, an amount must be entered on the right side of the ledger as a credit entry and the same amount has to be entered on the left side of the ledger as a debit entry. This accounting system is called a double-entry system (T-accounts).
In double-entry accounting, debits and credits are very crucial for the bookkeeping of a business to balance out correctly. Debits in T-accounts cause an increase in expense or asset accounts while decreasing revenue, equity, or liability accounts. Credit entries, on the other hand, cause an increase in revenue, equity, or liability accounts while decreasing expense or asset accounts.
For example, when reporting sales revenue, assume that Company ABC generates $5,000 for some goods that were sold. Reporting this transaction will cause an increase in the business’s assets account (Cash), and as such, this increase in the company’s asset account will be recorded as a debit of $5,000 to Cash. Recall that, a debit entry causes an increase in the asset account, this is why the cash account is increased by a debit entry of $5000.
Furthermore, as earlier said, it is compulsory in accounting for all debit entries to have credit entries. This means that, if a debit entry is made to an account by a certain amount, a credit entry must be made in another account by the same amount. Due to this rule, the $5,000 generated for the goods that were sold will be recorded also as a $5,000 credit entry to the Sales Revenue account. This will balance the debit of $5,000 that was made to Cash. Also, since a credit entry has been recorded in the Sales Revenue account, the equity will effectively increase due to this credit entry.
Now, if a company provides a service to a client that does not pay immediately, the company will record an increase in the asset account- Accounts Receivable by a debit entry, and also records an increase in Sales Revenue, as a credit entry.
Assuming Company ABC has a client that purchases its services for, $300 but is allowed to pay the company over the course of 30 days. A $300 debit entry will have to be made to the business’s Accounts Receivable. Now, under accrual accounting, even though the sales revenue has not yet been received, the company has to record this revenue because it was earned. This means that the company will also record a $300 credit to the Sales Revenue account causing the owner’s equity to increase.
When this client eventually pays the $300 debt as cash to Company ABC, two accounts again are affected, the Accounts Receivable account will be decreased by a credit entry of $300 and the Cash account will be increased by a debit entry of the same $300.
As seen from the illustration above, when a transaction is recorded, the debit entry must have a credit entry that corresponds with it while equaling the same amount. Hence, debit entry and credit entry are used to record any and all transactions within a business’s chart of accounts. For accounting purposes, every transaction in business has to be exchanged for something else that has the exact same value. Therefore, the total of the debit and credit entries for any transaction must always equal each other. This will make the accounting transaction to be in balance.
Conclusively, when debit entries are recorded, they add a positive number to the journal, whereas credit entries add a negative number. In the actual journal entries, these entries are not written as pluses and minuses, rather they are represented with the left-side and right-side formats. Hence, a debit entry will always be positioned on the left side of a ledger while a credit entry will always be positioned on the right side of the ledger.
Now, will sales revenue which is our main focus be entered on the left side or right side of the ledger? The position of sales revenue on the ledger will definitely be dependent on whether it has a natural debit or credit balance.
Now, that we have an understanding of sales revenue as well as the debit and credit concept in the double entry system, we can now answer the question of whether sales revenue is a debit or credit.
Is sales revenue debit or credit?
In business, sales revenue is responsible for an increase in business owners’ equity. Therefore, it is a credit entry. Recall that, credit entries cause an increase in revenue, equity, or liability accounts while decreasing expense or asset accounts. Since sales revenue causes the normal credit balance of the business owner’s equity to increase, it is recorded not as a debit but as a credit.
At the end of the accounting year, the credit balance of all revenue accounts is usually closed and then transferred to the owner’s capital account or retained earnings (stockholder’s equity account), thus increasing the business owner’s equity. Therefore, since sales revenues cause the owner’s equity to increase, it is credited and not debited.
The bottom line is, sales revenue is not recorded as a debit but as a credit because it represents a company’s income during an accounting period. This income has an impact on the company’s equity, thus, as a company generates revenue, its equity increases. Since the increase in income and equity accounts is a credit, sales revenues will definitely also be a credit entry.
In order to record the sales revenue generated from the sale of goods or services, one would need to credit the revenue account. A credit to the sales revenue account would increase it, while a debit to the account would decrease it. This is because when sales revenue is earned, it is recorded as a debit to accounts receivable (or the bank account) and as a credit to the revenue account.
Sales revenue increases with credit and not debit which means that if a company has more expenses than revenue, the balance in the revenue account will be lower and the debit side of the profit and loss will be higher. In conclusion, credit entries increase the balance in a sales revenue account whereas debit entries decrease the balance.
Related: Is Merchandise Inventory an Asset?
Why sales revenue is not a debit but a credit
The reason why sales revenue will be a credit entry and not a debit entry all falls back to the accounting equation. According to Pacioli’s double-entry bookkeeping system, the assets in a balance sheet or ledger, have to equal liabilities plus shareholders’ equity which is reflected in the balance sheet equation, which is expressed as:
In a balance sheet, the asset account has a natural debit balance that offsets the natural credit balance of liabilities and equity accounts. When a company makes sales or provides a service, the sales revenue that is earned (in the absence of any offsetting expenses) automatically increases the company’s profits which increases equity.
That is, sales revenue causes an increase in the equity account that has a natural credit balance. An increase in equity can only result from transactions that are credited. Therefore, sales revenue accounts usually have credit balances that are increased with a credit entry. Hence, their balances in a double-entry system will be on the right-hand side of the ledger. So, sales revenue is not entered as a debit but as credit.
Sales revenue: debit and credit journal entries
Sales revenue and expenses are recognized and reported under the accrual accounting system. Therefore, when the sales or expenditure has been made, it is recognized and recorded irrespective of when cash is received or paid. Here are some journal entries of sales revenue not as a debit but as a credit entry.
Debit and credit journal entry for when sales revenue is earned
When a company has earned sales revenue either for goods sold or services provided, the journal entry that will be passed into the accounting books is as follows:
|Cash or Bank account||00|
Debit and credit journal entry for when sales revenue is received but goods/services have not been delivered
It is possible for a company to generate sales revenue for goods or services that are yet to be delivered. This happens when a customer makes an advance payment for a good or service which is yet to be delivered. Since several businesses record revenue using the accrual system of accounting, sales revenue will only be recognized when the goods or services have been provided to the customer.
Therefore, if sales revenue has been received in advance, and the goods are yet to be delivered, it becomes a company’s liability. This sales revenue will therefore be recorded as deferred revenue. This is a liability on a company’s balance sheet that represents an advance payment that has been made by its customers for goods or services that are yet to be delivered.
Therefore, the journal entry for this deferred revenue will be as follows:
|Cash or Bank account||00|
This deferred revenue is not entered into the income statement and can only be recognized on the income statement as sales revenue when the paid goods or services are delivered. Until then, the deferred revenue is reported as a liability on the balance sheet to show that the business owes the reported amount in lieu of the goods or services yet to be delivered.
When the goods or services that the company owes the customer have been delivered, the journal entry for this would now be as follows:
Debit and credit journal entry for when goods or services are sold but sales revenue is not received
There are cases whereby a business gives goods or renders services on credit to their customers, to probably pay in 30 days. In this case, sales revenue has been earned but payment has not yet been received. This kind of revenue is recorded as accrued revenue. Under the accrual system of accounting, accrued revenue is recognized and recorded because revenue has been earned even though no cash has been received.
The journal entry for this accrued revenue would be as follows:
|Account Receivables or Debtor account||00|
|Accrued Revenue or Sales Revenue||00|
See also: Common stock: debit or credit?
Example: Sales revenue debit or credit?
Let’s look at an example of how sales revenue is recorded not as a debit but as a credit:
Company ABC makes sales and receives $1500 which it has earned. The company’s asset account- Cash will definitely increase by a debit entry of the $1500 earned. Since every entry must have a debit entry that is equal to a credit entry, a credit entry of $1500 will be recorded in the account- Sales Revenues. This credit entry in the Sales Revenue account will definitely cause an increase in the owner’s equity. The journal entry for this will be as follows:
Now, if the next day, Company ABC earns an additional $500 of revenue but allows the customer to pay in 30 days. This will cause an increase in the company’s assets-Accounts receivable, by a debit of $500 to the account. Because this revenue was earned, it will be recorded as a credit of $500 in Sales Revenues. The journal entry for this will be as follows:
Related: Cost of sales debit or credit?