What is journal entry for credit sales?

Even though this is a relatively straightforward transaction, a sale on credit, there are actually two possibilities for the journal entries we record. The exact double entry will differ depending on whether the business in question is using the periodic or perpetual inventory system .

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1) Periodic Inventory System
2) Perpetual Inventory System
Example of the Sales Journal Entry
What is a credit journal entry?
Which journal is total credit sales?

1) Periodic Inventory System

The periodic inventory system is where our records of goods are only periodically accurate (i.e. only at certain points in time, namely when we do a physical inventory account). Because we don't have perpetually (continuously) accurate records of our inventory, we use the Purchases account, an expense account, when we purchase goods - instead of an asset account (Inventory).

Here is the journal entry for a credit sale under the periodic inventory system:

Dr Debtors / Accounts Receivable.................R242.39
Cr Sales......................................................................R242.39

Sales are income, which occurs on the right side of our accounting equation, so we credit it. The debit entry (left side entry) is to our asset account, Debtors or Accounts Receivable, which is increasing. Debtors or accounts receivable is the total of amounts owed to our business.

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Note that we do not do anything with Cost of Goods Sold at this point in time, we only calculate and record Cost of Goods Sold at the end of the accounting period.

2) Perpetual Inventory System

With the perpetual inventory system we do keep perpetual (continuously up-to-date) records of our inventory on hand. As a result, when we purchase goods, we record an asset account called Inventory (instead of the Purchases account used in the periodic system).

Here is the journal entry for a credit sale under the perpetual inventory system:

Dr Debtors / Accounts Receivable.................R242.39
Cr Sales......................................................................R242.39

This is the exact same as for the periodic system. However, in the perpetual system, we have an additional journal entry:

Dr Cost of Goods Sold.................R150
Cr Inventory.........................................R150

(For the entry above, I'm assuming these goods we sold for R242.39 originally cost us R150)

In this second journal entry for the perpetual system, we remove the inventory (asset account) from our records by crediting it at its original cost price and we debit the Cost of Goods Sold account, which is an expense account which will be used to compare against Sales in our income statement to work out the Gross Profit:

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Remember, this second journal entry above at the time of the credit sales transaction (Inventory and Cost of Goods Sold) is only for the perpetual inventory system, it does not apply to the periodic inventory system. Under the periodic inventory system we'll do a similar entry for Cost of Goods Sold but only at the end of the period , after a full physical inventory count to verify the actual goods on hand.

So, as you can see, one has to know which kind of inventory system is being used before one can do the correct journal entries at the time of the credit sale.

In most accounting questions they will tell you if the business is using a periodic or perpetual system. If they don't mention either one explicitly (like this question), you can usually assume that they are using a periodic system.

What did you think of this credit sale journal entry example? Have your say by clicking "Click here to post comments" below.

And if you found these concepts or journals confusing, take a look at some of the related tutorials (listed below), especially the full tutorial on Perpetual and Periodic Inventory.

A sales journal entry records the revenue generated by the sale of goods or services. This journal entry needs to record three events, which are the recordation of a sale, the recordation of a reduction in the inventory that has been sold to the customer, and the recordation of a sales tax liability. The content of the entry differs, depending on whether the customer paid with cash or was extended credit. In the case of a cash sale, the entry is:

[debit] Cash. Cash is increased, since the customer pays in cash at the point of sale.
[debit] Cost of goods sold. An expense is incurred for the cost of goods sold, since goods or services have been transferred to the customer.
[credit] Revenue. The revenue account is increased to record the sale.
[credit]. Inventory. The inventory asset account is reduced to reflect the reduction of inventory caused by the sale, when goods are transferred to the customer.
[credit] Sales tax liability. If a sales tax liability is created by the sale transaction, it is recorded at this time, and will later be eliminated when the sales tax is remitted to the government.

If a customer was instead extended credit (to be paid later), the entry changes to the following:

[debit] Accounts receivable. A receivable is created that will later be collected from the customer. This replaces the increase in cash noted in the preceding journal entry.
[debit] Cost of goods sold. Same explanation as noted above.
[credit] Revenue. Same explanation as noted above.
[credit] Inventory. Same explanation as noted above.
[credit] Sales tax liability. Same explanation as noted above.

Example of the Sales Journal Entry

For example, a company completes a sale on credit for $1,000, with an associated 5% sales tax. The goods sold have a cost of $650. The sales journal entry is:

What is a credit journal entry?

A credit entry is used to decrease the value of an asset or increase the value of a liability. In other words, any benefit giving aspect or outgoing aspect has to be credited in books of accounts. The credits are entered in the right side of the ledger accounts.

Which journal is total credit sales?

Sales journal. The sales journal lists all credit sales made to customers. Sales returns and cash sales are not recorded in this journal. Entries in the sales journal typically include the date, invoice number, customer name, and amount.