When a business sells goods on credit, it permits the customer to take the goods immediately with the agreement to pay at a later date. This transaction is referred to as a credit sale, and it is recorded in the accounting system through the sold goods on credit journal entry. Even though no cash is received at the time of sale, the revenue is recognized immediately, as per the accrual basis of accounting. The journal entry
| Accounts Receivable A/c Dr. To Sales A/c |
It records a credit sale, showing that goods have been sold and payment is expected later. It increases both revenue and the receivable amount in the books. This type of transaction increases both the business’s sales revenue and its accounts receivable, which is the amount owed by the customer. Properly recording this ensures that income is reported accurately and the balance of receivables is up to date in the financial records. This process is essential for managing cash flow, customer balances, and preparing financial statements.
What is Credit Sales?
Credit sales mean selling goods to a customer without taking money at the time of sale. The customer promises to pay the money later. Businesses use credit sales to increase customer loyalty and sales volume. It helps customers to buy more even if they do not have cash. However, it also comes with a risk, as the customer might delay or fail to pay.
In accounting, credit sales are important because they create a legal obligation for the customer to pay. The business has to record the sale and also record that the customer owes them money. This is known as accounts receivable. Every business keeps a record of credit transaction journal entries in their credit sale journal to maintain proper books.
When a business makes a sale for cash, it receives money immediately. But in a sale on credit entry, money comes later. So, in a credit sales journal entry, we do not write cash. Instead, we write Accounts Receivable because it is the money expected from the customer.
Example on Credit Sales
If Ram Traders sells goods worth ₹10,000 to Shyam & Co. on credit, Ram Traders must record it like this:
Accounts Receivable A/c Dr. ₹10,000
To Sales A/c ₹10,000
This entry is made in the journal for credit transactions.
- Businesses keep records of such transactions using a credit purchase and sales journal entry system. These records help in tracking how much money is pending and from whom. This is very important for managing business finances.
- The entry for goods sold on credit is done on the day the goods are given to the customer, not when money is received. Later, when the customer pays the money, another journal entry is made to record the receipt.
- So, recording credit sales properly is very important for every business, big or small. It shows how much money the business has yet to receive and helps with planning expenses.
How Do You Record Sold Goods On Credit Journal Entry?
Recording sold goods on credit journal entries is a simple but very important task in accounting. It shows that a business sold goods and is yet to receive money from the buyer. This entry helps the business keep track of who owes them money and how much.
- Before recording the journal entry for credit sales, the accountant should check the invoice. The invoice tells the quantity, price, date, and name of the customer. Once this information is ready, the accountant makes the following journal entry:
| Accounts Receivable A/c Dr.To Sales A/c |
- Here, the business is expecting money from the customer, and it has made a sale. This credit sales journal entry is written in the credit sale journal on the day of the transaction.
- In India, small and big businesses use the same method for recording credit sales. They write this entry in the general journal and then post it into the ledger. Here is an example of how it looks in the journal book:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
| 01-Apr-25 | Accounts Receivable A/c Dr. | 20,000 | ||
| To Sales A/c | 20,000 | |||
| (Goods sold to Ramesh on credit) |
In this case, the company sold goods worth ₹20,000 to Ramesh on credit.
- This journal entry of sold goods on credit increases the sales account and also increases the accounts receivable. It shows that the business made a sale and is waiting for the money. This is how sold goods on credit accounting works in real life.
- Businesses should record every sale in a credit journal properly. If they forget or make mistakes, it becomes difficult to collect money later. It also affects the balance sheet and profit calculation.
- In India, during tax filing and GST returns, businesses must show correct credit transaction journal entries. Therefore, accurate recording helps not only in managing business but also in legal compliance. This method is part of the double entry for credit sales. Let’s now understand that system in the next section.
Journal Entry for Credit Sales with Example
The journal entry for credit sales is used when a business sells goods to a customer with the agreement that payment will be made at a later date. This type of transaction is common in business operations and must be recorded accurately to reflect both the revenue earned and the amount owed by the customer. Recording credit sales ensures that the sales account is credited to show income and the Accounts Receivable Account is debited to show that money is yet to be received. Understanding this entry is crucial for maintaining correct financial statements and managing customer balances effectively.
Case 1: Simple Credit Sale
A simple credit sale occurs when goods are sold to a customer without any tax or discount. The customer agrees to pay later, so no cash is involved immediately.
Example1: Company A sold goods worth ₹15,000 to Customer B on credit.
Accounts Receivable A/c Dr. ₹15,000
To Sales A/c ₹15,000
This is the normal journal entry for credit sales. It increases receivables and increases sales.
Case 2: Sale with GST
When a sale includes GST, the total receivable includes the tax amount. GST is collected on behalf of the government and must be recorded separately.
Example 2: Goods sold for ₹10,000 + GST @18% = ₹11,800
Accounts Receivable A/c Dr. ₹11,800
To Sales A/c ₹10,000
To Output GST A/c ₹1,800
Here, GST is also recorded separately. This type of entry is important in Indian accounting.
Case 3: Sale with Discount
In businessi if a trade discount is offered, it’s deducted from the sales value before recording. Only the net amount after discount is recorded in the sales account.
Example 3: Goods sold for ₹20,000. A trade discount of ₹2,000 was given. Invoice made for ₹18,000.
Accounts Receivable A/c Dr. ₹18,000
To Sales A/c ₹18,000
Note: Discount is not recorded in a journal entry. Only the net amount is recorded.
These examples show how credit sale journal entries change based on the type of sale. Every student must practice these examples to understand the concept well.
Always use the accounts receivable journal entry to show that money is yet to come. Do not use a cash account unless money is received. Using the right sales on credit entry ensures that both parties, seller and buyer, can track their books. In the Indian system, this accuracy also helps in tallying GST returns and profits.
Double Entry System for Sold Goods on Credit
The Double Entry System for sold goods on credit ensures that every credit sale transaction is recorded with equal debits and credits, maintaining the balance of the accounting equation. When goods are sold on credit, two accounts are affected: the Accounts Receivable Account (which is debited) and the Sales Account (which is credited). This system helps in accurately tracking both the revenue earned and the amount owed by the customer, providing a clear and complete financial picture. It is a fundamental principle in accounting and is essential for reliable financial reporting.
Importance of Double Entry in Credit Sales
This system is the backbone of modern accounting. It gives accurate and complete records. When we use this system, we can easily prepare the trial balance, profit and loss account, and balance sheet. Let’s understand it better:
When Goods Are Sold On Credit, We Write
This entry increases assets (accounts receivable) and increases revenue (sales). So, it affects both sides of the balance sheet.
| Accounts Receivable A/c Dr.To Sales A/c |
If The Customer Later Pays The Money, We Write
This removes the receivable and adds to the cash. Again, two accounts are updated.
That is why the credit sales journal entry always follows the double-entry rule. Without this, the accounting books become incomplete and incorrect.
| Cash/Bank A/c Dr.To Accounts Receivable A/c |
Advantages of Double Entry for Credit Sales
The system is used in all credit purchases and sales journal entries in every business. From a small shop to a big company, everyone follows this method. Indian students must understand this system because it is used in exams, real jobs, and business. So, every time you record a journal entry of sold goods on credit, you must check that both accounts are recorded. One is debited, and the other is credited. This is the golden rule.
- Shows accurate income
- Tracks customer dues
- Helps in GST and tax returns
- Builds trust in accounting records
- Matches balance sheet correctly
Relevance to ACCA Syllabus
In ACCA, understanding journal entries such as “sold goods on credit” is essential for Financial Accounting (FA), Financial Reporting (FR), and Audit and Assurance (AA) papers. This knowledge helps students apply IFRS standards like IFRS 15 (Revenue Recognition) and record transactions properly in books of accounts. It forms the base for trial balances, ledger management, and preparation of final accounts. Correct handling of such entries is also tested in consolidated financial statements and audit trails.
Sold Goods on Credit Journal Entry ACCA Questions
Q1: What is the correct journal entry for goods sold on credit worth $5,000?
A) Cash A/c Dr. 5,000
B) Sales A/c Dr. 5,000
C) Accounts Receivable A/c Dr. 5,000; To Sales A/c 5,000
D) Sales A/c Dr. 5,000; To Accounts Receivable A/c 5,000
Answer: C) Accounts Receivable A/c Dr. 5,000; To Sales A/c 5,000
Q2: Under which IFRS is the revenue from credit sales recognized?
A) IFRS 7
B) IFRS 9
C) IFRS 13
D) IFRS 15
Answer: D) IFRS 15
Q3: In double-entry bookkeeping, what does credit to the Sales Account represent?
A) A liability incurred
B) An expense recorded
C) Revenue earned
D) Cash received
Answer: C) Revenue earned
Q4: If a customer does not pay for credit sales, which account is adjusted?
A) Inventory
B) Bad Debts Expense
C) Accounts Payable
D) Retained Earnings
Answer: B) Bad Debts Expense
Q5: Where is the balance of Accounts Receivable shown in financial statements?
A) Income Statement under Expenses
B) Statement of Cash Flows
C) Balance Sheet under Liabilities
D) Balance Sheet under Current Assets
Answer: D) Balance Sheet under Current Assets
Relevance to US CMA Syllabus
In the US CMA exam, this topic is relevant under Part 1: Financial Planning, Performance, and Analytics. Recording credit sales affects financial statements and working capital analysis. It is also crucial in budgeting, variance analysis, and accounts receivable turnover analysis.
Sold Goods on Credit Journal Entry US CMA Questions
Q1: What is the immediate impact on working capital when goods are sold on credit?
A) Decrease in working capital
B) No change in working capital
C) Increase in working capital
D) Decrease in revenue
Answer: C) Increase in working capital
Q2: Which financial ratio increases after a large volume of credit sales?
A) Current ratio
B) Quick ratio
C) Receivables Turnover Ratio
D) Inventory Turnover Ratio
Answer: C) Receivables Turnover Ratio
Q3: What happens to net income when credit sales increase with no collections?
A) Net income increases
B) Net income decreases
C) No impact on net income
D) Only cash flow increases
Answer: A) Net income increases
Q4: When goods are sold on credit, which of the following is debited?
A) Sales Revenue
B) Accounts Payable
C) Accounts Receivable
D) Cash
Answer: C) Accounts Receivable
Q5: Which of the following is NOT directly affected by a credit sale?
A) Accounts Receivable
B) Sales Revenue
C) Inventory
D) Accounts Payable
Answer: D) Accounts Payable
Relevance to US CPA Syllabus
The US CPA syllabus places this under FAR (Financial Accounting and Reporting). Students must understand the impact of credit transactions on revenue recognition, balance sheet classifications, and accounts receivable accounting. It’s also key in the preparation of adjusting entries, closing entries, and audit documentation.
Sold Goods on Credit Journal Entry US CPA Questions
Q1: What does the “Accounts Receivable” entry represent in credit sales?
A) A liability
B) An asset
C) An expense
D) Equity
Answer: B) An asset
Q2: In accrual accounting, when is revenue recognized for credit sales?
A) When goods are shipped
B) When cash is received
C) When an invoice is prepared
D) When payment is delayed
Answer: A) When goods are shipped
Q3: Which adjusting entry is made if credit sales become uncollectible?
A) Sales A/c Dr.
B) Cash A/c Cr.
C) Bad Debts Expense A/c Dr.
D) Inventory A/c Dr.
Answer: C) Bad Debts Expense A/c Dr.
Q4: Which GAAP principle supports recording sales even without cash?
A) Revenue Recognition Principle
B) Matching Principle
C) Going Concern
D) Full Disclosure
Answer: A) Revenue Recognition Principle
Q5: Where do you show uncollected credit sales in financial statements?
A) Notes to Accounts
B) Equity Section
C) Cash Flow from Financing
D) Trade Receivables under Current Assets
Answer: D) Trade Receivables under Current Assets
Relevance to CFA Syllabus
In the CFA curriculum, particularly in Level I Financial Reporting and Analysis, understanding credit transactions is vital to analyzing financial statements, working capital, and earnings quality. It affects the interpretation of ratios, income recognition, and cash flow analysis.
Sold Goods on Credit Journal Entry CFA Questions
Q1: How do credit sales affect the cash flow statement?
A) Increase operating cash flows
B) Decrease operating cash flows
C) No change in cash flow
D) Recorded under financing activities
Answer: C) No change in cash flow
Q2: Credit sales increase which financial statement line item?
A) Current Liabilities
B) Operating Cash Flow
C) Accounts Receivable
D) Cost of Goods Sold
Answer: C) Accounts Receivable
Q3: A company with increasing receivables but flat sales may be: A) Improving inventory
B) Inflating revenue
C) Reducing liabilities
D) Paying dividends
Answer: B) Inflating revenue
Q4: What effect do credit sales have on income statement ratios?
A) Reduce profitability
B) Improve liquidity
C) Increase earnings
D) Affect dividend payout
Answer: C) Increase earnings
Q5: Which concept ensures revenues are recorded with earned credit sales?
A) Historical Cost
B) Revenue Recognition
C) Prudence
D) Materiality
Answer: B) Revenue Recognition
