Double-Entry Accounting
Double-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 Accounts
You’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.
Asset accounts record the value of a company’s property.Liability accounts keep track of debts that a business owes.Equity, also known as the book value of the business, is the value of assets minus liabilities.Income accounts record funds coming into the business, including customer purchases.Expense accounts record what a company has spent money on, like payroll or inventory.
A Practical Example
This 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:
3 pair of socks for a total of $12.002 men’s shirts for a total of $55.00
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:
(Today’s Date) Clothing—Sales Receipt # $71.02
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 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 Sale
A 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.
