What Is a Sales Journal Entry: Definition & Importance
No matter what kind of business you’re running, sales is an important part of it. Any time a sale is made, it needs to be recorded in your books of accounts. The act of recording that information is called making a journal entry.
Journal entries are a vital part of any business’s accounting practices. How they’re recorded depends on how sales are being made, though. A cash sales journal entry differs from a credit sales journal entry. Learn about the different ways to record these types of sales here!
Here’s What We’ll Cover:
What is a Sales Journal Entry?
A sales journal entry is an entry specifically about sales made to a customer. While sales journal entries seem straightforward, there are some specifics that have to be considered. These journal entries record a number of changes in different accounts. These include:
- Entries for cost of goods sold
- Entries for inventory
- Sales tax payable accounts, or sales tax liability
Without creating an update to accounts, your general ledger will be off. This can affect all of your accounting records moving forward.
Recording Journal Entries for Services
When journal entries are recorded for sales, debits and credits must be created for specific accounts. After they’ve been entered, the accounts should all balance out. If they don’t, mistakes will be found on the balance sheet. Additionally, all entries need a sales order entry date. This is the best way to keep track of sales during your accounting period.
Journal Entries for Cash Payments
If you sell a product to a customer who pays in cash, you’ll have to create several entries. First, a debit needs to be made to your cash account. Then, you need to create a credit to sales revenue accounts.
This transaction won’t be entirely revenue for your business, though. There are also accounts that have to do with liabilities that must be modified. An increase to your sales tax liability account is necessary. When you make a sale, a collection of sales tax also takes place, hence the increase to the liability account.
However, if the product is tax-exempt, that means that sales taxes aren’t collected. This negates the need to affect your sales tax liability account.
Journal Entries for Sales on Credit
Offering credit to customers implies that they’ll be receiving goods without paying for them immediately. Because of this, a different method of recording sales has to be used. This method involves recording to your accounts receivable. Receivable accounts are any accounts that record how much a customer owes to your business. Think of them as collection accounts.
When a sale is made on credit, a debit to accounts receivable is created. Again, a credit is created for revenue. Just like with a cash sale, an entry may need to be made regarding sales taxes. It is recorded the same way.
However, the process isn’t over here. The customer has yet to provide payment for the product they have received. You’ll receive cash payment at a later date. When the customer pays, a debit is created for your cash account. At the same time, a credit is created for your accounts receivable accounts. This brings the balance of your accounts receivable to zero.
Recording Journal Entries for Goods
When goods are involved in a sale, other entries in accounts must be made in addition to those listed above. These additional accounts include cost of goods sold and inventory. The cost of goods sold entry is going to be a debit. The inventory entry will be a credit. These two entries will be identical figures.
The idea behind this is related to getting rid of on-hand inventory. When you sell it, you reduce the liabilities you have with inventory. However, it also increases the total cost of goods sold for your business.
Frequently Asked Questions
Q: Are accounts payable affected by sales?
A: No, accounts payable are only affected by purchases. This is a representation of money going out of your business, also known as spending.
Q: Why are journal entries for sales important?
A: There are a number of reasons that these entries are important. However, the most important reason is related to financial reports. If accounts aren’t created for sales, then financial statements will be incorrect. This can ruin your business’s accounting records.
Q: What is the best way to record entries?
The best way to record entries is by using flexible accounting software. Many accounting software options allow entries to be created both manually and automatically. Some even allow you to instantly make an accounting entry from a sales invoice. Automation is a way to make your business function smoothly.
In addition to software, a print sales journal can also be used. However, this method is a bit more time-consuming.
Keeping an accurate record of your business’s sales is a must. By creating sales journal entries, you’re keeping track of your company’s financial data. This is the best way to see success in any business. It helps create an understanding of both active sales and future sales.
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