Double-entry bookkeeping is called "double-entry" because each transaction is recorded in at least two accounts using debits and credits. If you make a debit in one account, you must make a credit in another account. The total debits and credits must balance, or be equal to each other. You can use double-entry bookkeeping when selling a product or service on credit. The customer gets the product or service now and pays later. Show
Key Takeaways
Double-Entry AccountingDouble-entry bookkeeping is also known as double-entry accounting. The underlying principle of double-entry accounting is that Assets = Liabilities + Equity. If assets go up, liabilities or equity must go up as well. Credit sales are reported on both the income statement and the company's balance sheet. On the income statement, the sale is recorded as an increase in sales revenue, cost of goods sold, and possibly expenses. The credit sale is reported on the balance sheet as an increase in accounts receivable, with a decrease in inventory. A change is reported to stockholder's equity for the amount of the net income earned. In principle, this transaction should be recorded when the customer takes possession of the goods and assumes ownership. Five Types of AccountsYou'll need to record information from five types of accounts when doing double-entry bookkeeping: asset accounts, liability accounts, equity, expense accounts, and income accounts.
A Practical ExampleThis example is relevant to small businesses who offer credit to their customers: You are the bookkeeper for XYZ Clothing Store. A customer has just shopped in your store and purchased the following items:
It makes the total sale $67.00. The sales tax in your state is 6% for a total of $4.02 in sales tax. The sales total is $71.02. The customer has an account with your store and plans to buy this merchandise on credit. Here is the bookkeeping entry you would make, hopefully using your computer accounting software, to record the journal transaction. You would enter this information in two places. First, you would enter the data into your Sales Journal. Second, you would enter the data into the customer's account. The entry into the customer's account should look something like this:
The entry into your sales journal would use three figures—the subtotal of sales, total sales, and sales tax. Here is how the entry would look: Sales Journal Entry—Credit Receipts for (Today's Date)
Credit TermsWhen companies extend credit to a customer, it carries a certain time period in which the invoice or amount of sale is due, e.g., 30 days. The company may also offer a discount if payment is made within a shorter period of time, e.g., 10 days. Credit sales carry a certain time period in which the invoice is due. They may offer a cash discount if the payment is made within a certain period of the actual sale date. Credit SaleA sale is recorded when the risk and rewards inherent in the product transfer to the buyers, and results in income and assets. Income must be credited and assets, such as inventory, must be debited. Of course, credit sales always involve the risk that the buyer might not pay what they owe when the amount is due. It results in bad debts expense, which is estimated based on the creditworthiness of the buyer and the company’s previous experience with that customer and credit sales. Frequently Asked QuestionsWhat is the golden rule of double entry bookkeeping?The golden rule of double-entry accounting is that Assets = Liabilities + Equity. Both sides of the equation must always balance. What are the responsibilities of a bookkeeper?Bookkeepers are responsible for recording and maintaining financial transactions, processing payments, collecting financial data, creating financial reports, and managing the business's books so that an accountant can use them during tax season. Are credit sales considered revenue?Credit Sales refer to the revenue earned by a company from its products or services, where the customer paid using credit rather than cash. The gross credit sales metric neglects any reductions from customer returns, discounts, and allowances, whereas net credit sales adjust for all of those factors.
Is credit sales revenue or asset?You can find a company's credit sales on the "short-term assets" section of a balance sheet. Because companies don't receive payments from credit sales for many weeks or even months, credit sales appear as accounts receivables, a component of short-term assets on the balance sheet.
How do you record credit sales revenue?Credit sales are reported on both the income statement and the company's balance sheet. On the income statement, the sale is recorded as an increase in sales revenue, cost of goods sold, and possibly expenses.
Why are credit sales classified as revenue?In bookkeeping, revenues are credits because revenues cause owner's equity or stockholders' equity to increase. Recall that the accounting equation, Assets = Liabilities + Owner's Equity, must always be in balance.
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