Journal Entry for Credit Sale: A Comprehensive Guide

When a business sells goods or services on credit, the buyer receives the goods or services immediately, with the promise to pay at a later date.

In a business’s accounting ledger, this is recorded as a credit sale.

In a credit sale, the seller usually sets up an account for the buyer and invoices them for the purchase amount, typically including any applicable interest or fees. The buyer then has a certain period of time, known as the credit term, in which to pay the seller back.

Credit sales are common in many industries, including retail, manufacturing, and services.

They can be very beneficial for businesses to increase sales by allowing customers to make purchases when they may not have the funds available to pay in full upfront. Additionally, businesses can benefit from any interest charges that are applied to the selling price

However, credit sales also come with the risk that the buyer may not pay, leading to potential financial losses for the seller, where the amount owed would need to be written off as a bad debt

This is a fundamental aspect of bookkeeping and accounting, and understanding the debits and credits involved is vital as an accountant.

How To Record a Credit Sale

When a business makes a credit sale, there are three accounts involved:

The Accounts Receivable Account
The Sales Account
The Cash Account

Accounts Receivable Account	Debit	Asset	Debits increase the asset value
Sales Account	Credit	Income	Credits increase the asset value
Cash Account	Debit	Asset	Debits increase the asset value

Using the DEAD CLIC mnemonic to understand the debits and credits:

The Accounts Receivable account is an asset, as it represents a future economic benefit that is expected to be received by the company. It is an asset that is expected to be converted into cash within a relatively short period of time, usually no longer than a year.

The Sales account is an income statement account that records the revenue earned by a company from the sale of its products or services. It represents the total amount of money that a company has earned from its sales during a particular period.

The Cash account in an asset, as again, it contains economic value and/or future benefit.

How to Record a Sales Credit Journal Entry

Let’s take a look at an example of a journal entry for a credit sale, from the customer initially purchasing the goods or services, through to them paying their debt off:

Step 1: Journal Entry for Credit Sale

A customer purchases goods on credit for £500.

The journal entry to record this transaction would be:

Accounts Receivable Account	Debit	Balance Sheet	£500
Sales Account	Credit	Income Statement	£500

As the sale is on credit, the customer has received their goods, but no cash has been received yet.

The Accounts Receivable account is debited, as the business expects to receive payment from the buyer at a later date.

The Sales account is credited, as the business has earned revenue from the sale of goods or services.

Step 2: Journal Entry for Customer Making Payment

We are now at the point in time where the customer wants to pay off some or all of their debt. In this instance, we will assume the customer is going to clear their £500 debt from earlier.

The journal entry to record this would be:

Accounts Receivable Account	Credit	Balance Sheet	£500
Cash Account	Debit	Balance Sheet	£500

The cash has been paid by the customer – in other words, our bank account has increased. As the cash account is an asset, we would increase this by debiting that account.

As the debt owed has now been paid, we need to clear the £500 debit that was posted when the purchase was initially made. As the Accounts Receivable Account is an asset, we would decrease that asset by posting a credit for £500 – this effectively offsets the initial journal entry in the Accounts Receivable Account.

This means that this customers account will now be showing a zero balance until their next purchase.