What is Sales Credit Journal Entry?
Sales Credit Journal Entry refers to the journal entry recorded by the company in its sales journal during the period when any sale of the inventory is made by the company to the third party on credit, wherein the debtors account or account receivable account will be debited with the corresponding credit to the Sales account.
How to Record Entry of Sales Credit?
When the goods are sold on credit to a buyer, the account receivable account debits, it leads to increase in the assets of the company as the amount is receivable from the third party in future and corresponding credit will be there in the Sales account which will lead to the increase in the revenue of the company. The entry to record the Sales on the Credit is as follows:
When the company receives the cash against the goods sold on credit, then the Cash Accounts will be credited as there is the receipt of the cash against the goods sold on credit. There will be corresponding credit in the accounts receivable accounts as the account was initially debited at the time of sales of goods and thus will be credited once the amount is received. The entry to record the receipt against the Sales on the Credit is as follows:
Example of Sales Credit Journal Entry
Example #1
Apple Inc is a dealer of laptop & Computers, and he is selling goods to John electronics on 01.01.2018 of $ 50000 on credit, and his credit period is 15 days, which means John Electronics has to make the payment on or before 30.01.2018.
Below are the Journal entries in the books of Apple Inc:
At the time of sale of laptop & Computer:
At the time of Receipt of Payment:
Example #2
Apple Inc gives cash discounts or early payment discounts. Assume in the above example, Apple Inc is offering a 10% discount if John Electronics makes the payment on or before 10.01.2018, and John Electronics makes his payment on 10.01.2018.
Below are the Journal entries in the books of Apple Inc:
Example #3
Assume in the above example, John is not able to make payment by 30.01.2018, and he got bankrupt, and Apple Inc believes that now outstanding is unrecoverable, and it is bed debt now.
Below are the Journal entries in the books of Apple Inc:
At the end of the financial year, Walter will pass entry for bad debt.
Example #4
ABC Inc sold goods of worth $ 1000 to XYZ Inc as on 01.01.2019 on which 10% tax is applicable, and XYZ Inc will make payment in two equal installments to ABC Inc.
Below entries will be passed in the books of ABC Inc.
At the time of credit sales:
In the above example, we assume the basis value of goods is $ 1000. Therefore, we have charges 10% of tax on that value, which ABC Inc will collect from XYZ Inc and pay to the government, and ABC Inc can take input credit of the same amount and claim as a refund from the government.
At the time of receiving of 1 Payment:
Example #5
For example, there is company A ltd. which deals in selling the different products in the market. On 1st August 2019, it sold some goods to one of its customers on credit, amounting to $ 100,000. At the time of selling the goods, it was decided that the customer will make the full payment against the goods received after 15 days. On 15th August 2019, a customer paid the whole amount to the company. Pass the necessary journal entry to record the sales of the goods on credit and the receipt of cash against the sales of goods.
Solution
On 1st August 2019, when the goods were sold on credit to the buyer of the goods, then the account receivable account will be debited with the corresponding credit to the Sales account. The entry to record the sales on credit is as follows:
On 15th August 2019, when the customer paid the whole amount in cash to the company against the goods sold on credit on 1st August 2019, then the cash accounts will be credited with the corresponding credit in the accounts receivable accounts. The entry to record the receipt against the sales on credit is as follows:
How to show Credit Sales in Financial Statements?
Now we will understand how to show all the above entry in financial statements.
- Credit Sales: Sales, whether it is cash or credit, both will come in profit & loss a/c under the income side with the sale value of goods.
- Debtors: Debtors are current assets; therefore, it will come in the Assets side of the balance sheet under current assets.
- Bank: Bank Balance is also current assets; therefore, it will show in assets side of the balance sheet under current assets. On the receipt of payment from customers, the bank amount will increase, whereas debtors will decrease; therefore, the total balance of current assets will not remain the same.
- Discount: Any discount given to the dealer comes under the expenditure side of the profit & loss account, and it will decrease the profitability of the company.
Advantages
- They help in recording the transaction involving the sale of goods on credit by the company appropriately, keeping track of every credit sales involved.
- With the help of a sales credit journal entry, the company can check the balance due to its customer on any date. This will help the company monitoring the balance outstanding of the customer in case the customer approaches again for credit sales.
Limitations
- If the person recording the transaction commits any mistake, then it will show the wrong transaction in the books of accounts of the company.
- When a large number of transactions is involved in the company, then recording the sales credit journal entry for every transaction of the company becomes problematic and time-consuming and thus also increases the chances of mistakes by the person who is involved in such matter.
Important Points
- When the goods are sold on credit to the buyer, then the account receivable account will be debited, which will lead to an increase in the assets of the company as the amount is receivable from the third party in the future. It leads to the asset creation of the company and shown in the balance sheet of the company unless settled.
- When the goods are sold on credit to the buyer of the goods, then the sales account will be credit in the books of accounts of the company. It will increase the revenue, and thus it will be shown in the income statement of the company in the sale period.
Conclusion
Sales credit journal entry is vital for companies that sell their goods on credit to their customers. At the time of sales on credit, accounts the receivable account will be debited which will be shown in the balance sheet of the company as an asset unless the amount is received against such sales and the sales account will be credited which will be shown as revenue in the income statement of the company.
It helps in recording the transaction involving the sale of goods on credit by the company appropriately, keeping track of every credit sales involved.
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