Making sales is the fun part of being a business owner. Your business earns income, and you’re making a customer happy.
What’s not to love?
Well, maybe the accounting part isn’t so fun. But it’s still important to make sure that there’s an accounting record of every sale you make. This way, you can balance your books and report your income accurately.
Let’s review what you need to know about making a sales journal entry.
What Is a Sales Journal Entry?
A sales journal entry is a bookkeeping record of any sale made to a customer. You use accounting entries to show that your customer paid you money and your revenue increased.
These types of entries also show a record of an item leaving your inventory by moving your costs from the inventory account to the cost of goods sold account.
Finally, if your state or local governments impose a sales tax, then your entry will show an increase in your sales tax liability.
That’s because the customer pays you the sales tax, but you don’t keep that amount. Instead, you collect sales tax at the time of purchase, and you make payments to the government quarterly or monthly, depending on your state and local rules.
At the time of writing, there are only five states in the U.S. that don’t have a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Even in these states, municipalities, and counties sometimes have sales tax requirements.
So, instead of adding it to your revenue, you add it to a sales tax payable account until you remit it to the government.
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Are Sales Debit or Credit Journal Entries?
Sales are credit journal entries, but they have to be balanced by debit entries to other accounts.
Sales are recorded as a credit to the revenue account. When you credit the revenue account, it means that your total revenue has increased.
In double-entry accounting, each credit needs to be balanced by a debit. So what’s the debit for a sale?
When you make a sale, you debit your cash account, which shows that money entered your business.
So let’s recap. To record the sale:
- Debit cash
- Credit revenue
If your customer purchased using a credit card, then you use accounts receivable instead of cash.
You also have to make a record of your inventory moving and the sales tax. To do this, you’ll need to adjust other accounts. Let’s take a look at what those are.
Which Accounts Are Used in Sales Entry Records?
When recording sales, you’ll make journal entries using cash, accounts receivable, revenue from sales, cost of goods sold, inventory, and sales tax payable accounts.
Debits and credits work differently based on what type of account they are. In bookkeeping, there are different types of accounts. For instance, cash is an asset account, while cost of goods sold is an expense account.
Some accounts are increased by debits and decreased by credits. Others are decreased by debits and increased by credits. This is how the entries balance each other out.
This can be a bit confusing if you’re not an accountant, but you can use this handy cheat sheet to easily remember how the sale journal entry accounts are affected.
In the next section, we’ll talk more about what each debit and credit means for the sale entry.
How Do You Record a Journal Entry for Sales?
In recording a journal entry for sales, you’ll need to pass entry for sales—that is, move the information to all of the different accounts where it needs to be recorded. To create a journal entry in your general ledger or for a sale, take the following steps.
- Debit the cash account for the total amount that the customer paid you, which includes sales price plus tax. This entry in your cash receipts journal shows an increase in your cash. If you let your customer purchase on credit, you’ll use the accounts receivable account from your balance sheet instead of cash. We cover this later on in the examples section.
- Debit the cost of goods sold account for the total amount of money it cost you to produce the item. You’ve already paid this amount to your supplier, you’re just moving it from inventory to cost of goods sold because someone purchased the item.
- Credit the revenue from the sales account for the sale price of the item (not including tax) to show how much money you earned.
- Credit the inventory account for the cost of the item to show that your inventory was reduced by one item. In other words, you’re moving the item’s value from inventory to cost of goods sold to show that your inventory decreased.
- Credit the sales tax payable account for the sales tax that the customer paid you. This shows that you received the money, but you now owe it to the government on your customers’ behalf. Since you’re not going to keep the tax money, it gets recorded here instead of in the revenue account.
To see how this works, let’s look at some examples.
Sales Journal Entry Examples
Here are a few different types of journal entries you may make for a sale or a return depending on how your customer paid.
Cash Sales Journal Entry
Let’s take a look at an example of a journal entry for cash sales. In this case, we’ll say that:
- You sold an item for $700.
- Sales tax is 10%.
- The customer paid a total of $770 in cash, which is $700 for the item and $70 for the sales tax.
- You calculated that the cost of goods sold for this item is $400.
Here’s how the journal entry would look.
Credit Sales Journal Entry
If your customer uses a credit card to buy the item, you’ll debit accounts receivable instead of cash since it’s income that you’re owed, but you haven’t been paid yet.
Return of a Sale Entry
To record a returned item, you’ll use the sales returns and allowances account. This account is for deductions from revenue that result from returns or allowances. This means that when you debit the sales returns and allowances account, that amount gets subtracted from your gross revenue.
Let’s look at an example where the customer paid cash and then changed their mind a few days later. They returned the item to you and received a full refund from you, including taxes.
Understanding the meaning of each debit and credit can be tricky when you’re dealing with returns.
Let’s break down what each line item means.
- Credit to cash for $770 shows that $770 left your account because you reimbursed the customer. Use a credit to accounts receivable instead of the cash account for credit card purchases.
- Credit to cost of goods sold for $400 decreases the cost of goods sold because that item is no longer sold.
- Debit to sales returns and allowances decreases your total sales revenue by $700 since the item was returned and you gave the money back.
- Debit to inventory for $400 increases the value of your inventory by $400 since the item was put back in your inventory to be sold to another customer.
- Debit to sales tax payable for $70 decreases your sales tax liability because the sale was reversed, so you no longer have to pay that tax to the government.
Sales Discount or Allowance Entry
An allowance is a price reduction on an item, often because of a sale or a flawed item like a floor display model with a dent.
For instance, say a customer finds a shirt in your store that sells for $50, but it has a button missing. But it’s the last shirt in their size so they still want to buy it.
So you give them a discount of 20% to make up for the inconvenience, making the final sale price $40. We’ll also assume a 10% sales tax and a $15 cost of goods sold.
Here’s how you would record that sale.
You’ll record a total revenue credit of $50 to represent the full price of the shirt. However, the debit to the sales returns and allowances account ultimately subtracts $10 from your revenue, showing that you actually only earned $40 for the shirt.
The reason you record allowances and returns in a separate account is because it helps you keep track of revenue losses from customers that change their minds or products with quality issues.
If your sales returns and allowances account is high compared to your revenue account, you may be offering too many discounts or have a product quality issue.
Keeping Track of Your Sales
Creating journal entries for each of your sales is an essential bookkeeping skill. You’ll need to use multiple accounts to show that you received money, your revenue increased, and your inventory value decreased because of the sale.
For locations with sales taxes, you also need to record the sales tax that your customer paid so you know how much to pay the government later.
If you have accounting software or a bookkeeper, you may not be making these entries yourself. But knowing how entries for sales transactions work helps you make sense of your general journal and understand how cash flows in and out of your business.
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