Sales and purchase journal entries, step by step

Most of a small business's entries are sales and purchases. Learn how to record a sale on account, buy inventory from a supplier, and record a sale together with the cost of the goods that left the shelf.

Why sales and purchases get their own rules

The basic debit and credit rules still apply: assets and expenses increase with a debit, while liabilities, equity and revenue increase with a credit. If those rules are new to you, start with journal entry practice problems first.

What makes sales and purchases trickier is timing. Businesses rarely pay or get paid on the spot. A customer is billed and pays next month. A supplier delivers goods and sends an invoice due in 30 days. The words "on account" tell you that no cash has changed hands yet. Instead, someone owes someone else money.

• Accounts Receivable is money customers owe the business. It is an asset.
• Accounts Payable is money the business owes its suppliers. It is a liability.

The second complication is inventory. A business that sells goods buys them first. Those goods are an asset while they sit on the shelf. They become an expense, called Cost of Goods Sold, only when they are sold.

The accounts you will use

Worked example 1: a sale on account

Northside Print Shop billed a customer $4,980.00 for services, payable in 30 days.

Work through it one question at a time.

1. What did the business receive? A promise to pay. The customer now owes $4,980.00, so Accounts Receivable goes up. It is an asset, so it is debited.
2. What did it earn? The printing is done, so the fee is earned today. Revenue is recorded when it is earned, not when the cash arrives. Service Revenue goes up, so it is credited.

Thirty days later, the customer pays. That second entry swaps one asset for another: debit Cash $4,980.00 and credit Accounts Receivable $4,980.00. Revenue is not touched again, because it was already recorded when the work was done.

Worked example 2: buying inventory on account

Pine Street Dental bought merchandise for resale costing $7,170.00 on account.

The business now has goods it plans to sell. They are an asset until they are sold, so Inventory goes up with a debit. It hasn't paid yet, so it owes the supplier. Accounts Payable goes up with a credit.

When the bill is paid, the liability goes away and so does the cash: debit Accounts Payable $7,170.00 and credit Cash $7,170.00. Notice that no expense appears in either entry. The cost becomes an expense later, when the goods are sold.

Worked example 3: selling inventory, with its cost

Northside Print Shop sold merchandise on account for $756.00. The merchandise cost Northside Print Shop $605.00. Northside Print Shop keeps a perpetual inventory record, so record the sale and its cost in one entry.

A perpetual inventory system updates the Inventory account every time goods come in or go out. So a sale of goods records two things at once:

• The revenue side, at the selling price. The customer owes $756.00, so debit Accounts Receivable. The business earned $756.00 of sales, so credit Sales Revenue.
• The cost side, at what the goods cost. Goods costing $605.00 left the shelf, so credit Inventory. That cost is now an expense of earning the sale, so debit Cost of Goods Sold.

Debits of $1,361.00 equal credits of $1,361.00. This is a compound entry: one entry with more than two lines. The two halves each balance on their own, which is a handy check.

The difference between the two halves tells you something useful. Sales of $756.00 minus cost of $605.00 leaves $151.00 of gross profit on this sale. That is the amount left to cover rent, wages and other running costs.

Following the goods through the books

It helps to watch one batch of goods move through the accounts from start to finish. Suppose a business buys goods for $605.00 on account, sells them for $756.00 on account, then settles both bills.

1. Buy the goods. Debit Inventory $605.00, credit Accounts Payable $605.00. The goods sit on the balance sheet as an asset.
2. Sell the goods. Record the four-line entry from example 3. Inventory drops back by $605.00, Cost of Goods Sold rises by $605.00, and the business has a $756.00 receivable.
3. Collect from the customer. Debit Cash $756.00, credit Accounts Receivable $756.00.
4. Pay the supplier. Debit Accounts Payable $605.00, credit Cash $605.00.

At the end, Inventory, Accounts Receivable and Accounts Payable are all back to zero for this batch. Cash is up by $151.00, and the income statement shows $756.00 of sales less $605.00 of cost. The cash gain and the gross profit agree, which is exactly what you would expect once every bill is settled.

Inventory or supplies?

Not everything a business buys is inventory. Inventory is merchandise bought to sell to customers. Items the business uses up itself, such as paper, cleaning products or office items, are usually recorded as Supplies, a separate asset, and become Supplies Expense as they are used.

The task wording is your guide. "Merchandise for resale" means Inventory. "Bought supplies" means Supplies. The two accounts look similar but end up in different places: Inventory turns into Cost of Goods Sold, while Supplies turns into Supplies Expense through an adjusting entry at month end.

Common mistakes and how to avoid them

These are the mistakes the exercises look for. Each one balances or almost balances, which is why they slip through.

Debiting Cash instead of Accounts Receivable

In the first example, a learner might debit Cash $4,980.00 and credit Service Revenue. The entry balances, but it claims money arrived when it didn't. The customer hasn't paid yet, so debit Accounts Receivable. A quick test: if the words "on account", "billed" or "payable in 30 days" appear, Cash should not move.

Expensing inventory when it is bought

It feels natural to treat a purchase as a cost straight away, and debit Cost of Goods Sold $7,170.00. But merchandise isn't an expense until it's sold. If it were expensed on arrival, profit would look $7,170.00 lower this period and the balance sheet would show no inventory at all. Debit Inventory when you buy; move the cost to Cost of Goods Sold when you sell.

Recording only the revenue side of a sale of goods

In the third example, a learner might record the $756.00 receivable and sales revenue and stop. That entry balances, but the goods that left the shelf are still sitting in Inventory, and no cost has been matched against the sale. Under a perpetual system, also debit Cost of Goods Sold and credit Inventory for $605.00.

Reversing every line

All three exercises catch entries where every debit and credit is swapped. For example, crediting Inventory and debiting Accounts Payable for a purchase would say the business returned goods and paid its bill. Ask whether each account went up or down. Inventory increased, so it is debited; the amount owed increased, so Accounts Payable is credited. In the compound sale, Sales Revenue and Inventory are the credits; Accounts Receivable and Cost of Goods Sold are the debits.

A quick checklist

• Was cash paid or received today? If not, use a receivable or a payable.
• Are the goods for resale? Debit Inventory, not an expense.
• Did goods leave inventory because of a sale? Record the cost line too.
• Is revenue at the selling price and inventory at cost?
• Do total debits equal total credits?

Related topics

After you post sales and purchases, the balances flow into the ledger and the trial balance. Customer balances can also be listed by age in an accounts receivable aging report in Excel. At month end, adjusting entries catch items that haven't been billed or paid yet.