Journal entry for goods sold on credit or cash
Introduction
In business, we may have sold goods both for cash as well as on credit during the accounting period. Likewise, we need to make the journal entry for the goods sold that may be made for cash or made on credit.
Additionally, if we use the perpetual inventory system, we also need to record the cost of goods sold at the time of the sale as well as update the balance of the inventory as the result of the goods sold. On the other hand, if we use the periodic inventory system, we only need to record the sales revenue together with the cash received or the accounts receivable increase as the result of the sale.
Journal entry for goods sold will increase both the total assets on the balance sheet and total revenues on the income statement regardless of the goods sold are made for cash or on credit. Additionally, the journal entry for the cost of goods sold with the reduction of the inventory is to reflect the actual balance of the inventory at the time of goods sold under the perpetual inventory system.
Journal entry for goods sold
Journal entry for goods sold for cash
We can make the journal entry for goods sold for cash by debiting the cash account and crediting the sales revenue account.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Sales revenue | $$$ |
This journal entry will increase both total assets on the balance sheet and total revenues on the income statement as the result of the goods sold that we have made.
Additionally, if we use the perpetual inventory system, we need to also make another journal entry to record the cost of goods as well as the reduction of the inventory as the result of goods sold. This is because, under the perpetual inventory system, we need to update the balance of inventory on the balance sheet every time there is an increase or decrease of the inventory.
Likewise, we can make the journal entry for the cost of goods sold and the reduction of the inventory by debiting the cost of goods sold account and crediting the inventory account.
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | $$$ | |
| Inventory | $$$ |
This journal entry will reduce the net sales revenue as we debit the cost of goods sold. At the same time, the inventory on the balance sheet will be reduced as a result of goods sold.
However, if we use the periodic inventory system, there won’t be a journal entry for the cost of goods sold and the reduction of inventory at the time of the sale. This is because we only update the inventory balance periodically which is usually by physically counting the actual inventory at the end of the year.
In this case, the journal entry for the goods sold for cash will only be the debit of the cash account as well as the credit of the sales revenue account.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Sales revenue | $$$ |
Journal entry for goods sold on credit
On the other hand, we can make the journal entry for goods sold on credit by debiting the accounts receivable and crediting the sales revenue account.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $$$ | |
| Sales revenue | $$$ |
As the accounts receivable is also an asset on the balance sheet, this journal entry will also increase both total assets and total revenues by the same amount of goods sold.
And if we use the perpetual inventory system, we will also need to make the journal entry for the cost of goods sold which is the same by debiting the cost of goods sold account and crediting the inventory account.
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | $$$ | |
| Inventory | $$$ |
On the other hand, if we use the periodic inventory system, we can just debit the accounts receivable and credit the sales revenue account.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $$$ | |
| Sales revenue | $$$ |
Example
For example, on June 30, we have made $5,000 goods sold on credit to one of our customers. This $5,000 has the original cost of $3,000 in our inventory record.
Later, on July 20, we have received a $5,000 cash payment from this credit sale. And we use the perpetual inventory system to manage the inventory in our merchandising business.
In this case, we can make the journal entry for the $5,000 good sold on credit by debiting this amount to the accounts receivable and crediting the same amount to the sales revenue account as below:
June 30:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 5,000 | |
| Sales revenue | 5,000 |
Additionally, as we use the perpetual inventory system, we also need to make the journal entry for the $3,000 of the cost of goods sold and the reduction of the inventory as below:
June 30:
| Account | Debit | Credit |
|---|---|---|
| Cost of goods sold | 3,000 | |
| Inventory | 3,000 |
Later, on July 20, when we receive the $5,000 cash payment for the goods sold on credit that we have made on June 30, we can make the journal entry as below:
July 20:
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Accounts receivable | 5,000 |
This journal entry is made for the $5,000 of the accounts receivable collection that we have received on July 20.
Example 2:
For another example, let’s assume that we use the periodic inventory system in our merchandising business instead. At the same time, assuming the $5,000 goods sold on June 30, in the example above is for cash instead of on credit.
If this is the case, we can make the journal entry for the $5,000 goods sold for cash as below instead:
June 30:
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Sales revenue | 5,000 |
And since we use the periodic inventory system, there is no journal entry for the cost of goods sold at the time of sale. Hence, the only journal entry that we need to make on June 30, is the debit of cash account and the credit of the sales revenue account above.