Sales are credited in an organization’s accounting records, since this increases the equity of the investors. The offsetting side of the journal entry is a debit - usually to either the cash or accounts receivable account. In essence, the debit increases one of the asset accounts, while the credit increases shareholders’ equity. These offsetting entries are explained by the accounting equation, where assets must equal liabilities plus equity.
The sales account accumulates the detail for all sales transactions over the course of a company’s fiscal year, after which the account balance is flushed out with closing entries and transferred in aggregate into the retained earnings account (which is an equity account).
There are cases in which a sale is reversed (perhaps due to a product return) or reduced (perhaps due to the application of a volume discount). When this happens, the sales account is debited, which reduces its balance. A follow-on effect of this entry is that the profits reported by the organization will decline.
Why Sales are Credited: Recognition of Earnings: A sale represents earned revenue and an increase in equity. In double-entry accounting, increases in equity are credited.
What are Credit Sales? Credit sales refer to a sale in which the amount owed will be paid at a later date. In other words, credit sales are purchases made by customers who do not render payment in full, in cash, at the time of purchase.
Credit sales are payments that are not made until several days or weeks after a product has been delivered. Short-term credit arrangements appear on a firm's balance sheet as accounts receivable and differ from payments made immediately in cash.
Revenue accounts like service revenue and sales are increased with credits. For example, when a company makes a sale, it credits the Sales Revenue account. Expenses, including rent expense, cost of goods sold (COGS), and other operational costs, increase with debits.
Sales account reflects the amount of revenue earned by the sale of goods/services of a business. Thus, it is an income for the business and according to the rule of accounting, all incomes are to be credited and all expenses are to be debited. Thus, a sale account always show credit balance.
Under the accrual basis or method of accounting, the sale occurs when the company has completed the required tasks. When customers are allowed to pay at a later date, the company records the sale with a debit to Accounts Receivable and a credit to the revenue account Sales.
Introduction: My name is Pres. Carey Rath, I am a faithful, funny, vast, joyous, lively, brave, glamorous person who loves writing and wants to share my knowledge and understanding with you.
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