Notes

Sales can be recorded in two inventory systems: periodic, where inventory is updated in chronological increments, or perpetual, where inventory is updated for each individual sale. Identify the benefits to using these systems and review examples of how each records a business's sales.
Recording Sales
Bentley has just started working at the local clothing store. A customer stops by to purchase a pair of jeans. Bentley rings up her purchase, collects her payment, and bags her purchase. He has made his first sale. Little does he know, but that sale has kicked off a chain of events that must occur in order for it to be reflected in the store's accounting records. It's called recording sales. Recording sales means to enter information about sales revenue into the accounting records so that it reflects accurate balances in affected accounts.

Perpetual System
Before sales can be recorded, the company has to have decided what type of inventory system to use - periodic or perpetual. A periodic system is one where inventory is updated at specific points in time, usually only once an accounting period. A perpetual system is one where inventory is updated after every single transaction.

For the purpose of this lesson, we are going to assume that the clothing store uses the perpetual inventory system.

Examples
Now let's analyze and record the sales transaction that Bentley just made. There are three specific things that we need to know to record this transaction - the selling price, the purchase price of the inventory, and the accounts affected. The selling price is the price that a customer pays for merchandise. In this transaction, we'll say that the selling price of the jeans was $40.

The purchase price is the price that the company pays for merchandise inventory. This amount includes any costs that are associated with the purchase of the goods, including shipping, receiving, and storage costs. The purchase price of the jeans was $25.

In the perpetual inventory system, a sale requires two separate entries in the accounting journal. The first entry will record the actual sale. The type of sale, which is either cash or sale on account, determines the account that will be debited on the first transaction. If the sale is a cash sale, the Cash account is debited. If the sale is a sale on account, which is a sale that is made where cash is received at a later date, the Accounts Receivable account is the account that will be debited.

Regardless of the type of sale that occurred, the account that will be credited is the Sales Revenue, which sometimes is just called Revenue. The second entry will take the merchandise that was sold out of the store inventory. In order to do this, the Cost of Goods Sold account is debited, and the Inventory account is credited. The amount that is associated with this entry is the purchase price of the item and not the sale price.

Since I have given you all the information that you need to record the sale, let's look at what the journal entries will look like for a cash sale.

Purchase Entry Debit Credit
Dec 1 Sales Revenue $ 40
Cash $40
Cash Transaction Debit Credit
Dec 1 Inventory $25
Cost of Goods Sold $25
As you see, these entries together show that the profit made from the sale of the jeans was $15 ($40 - $25).

Now let's look at the same transaction, but instead of it being a cash transaction, it is a sale on account.

Purchase Entry Debit Credit
Dec 1 Sales Revenue $40
Accounts Receivable $40
Cash Transaction Debit Credit
Dec 1 Iventory $25
Cost of Goods Sold $25
Once again, this entry shows a profit of $15 on the sale of the jeans.

Lesson Summary
In order to maintain harmony in accounting records, every single transaction that occurs must be recorded in the accounting records, and sales are no different. Recording sales means to enter information about sales revenue into the accounting records so that it reflects accurate balances in affected accounts. Before sales can be recorded, the company has to decide what inventory valuation system is to be used. In this lesson, we chose the perpetual system, which is one where inventory is updated after every single transaction.

There are three things that you have to know in order to record a sale using the perpetual system - the selling price, the purchase price, and the accounts that are affected by the sale. The selling price is the price that a customer pays for merchandise. The purchase price is the price that the company pays for merchandise inventory. The accounts that are affected by the sale is dependent on the type of sale that was made. A cash sale affects the following accounts: Cash, Sales Revenue, Cost of Goods Sold, and Inventory. The Cash account is debited for the selling price of the item. The Sales Revenue account is credited for the same amount. The Cost of Goods Sold account is debited for the purchase price of the item, and the Inventory account is credited for the same amount.

If the sale is a sale on account, then the accounts that are affected are Accounts Receivable, Sales Revenue, Cost of Goods Sold, and Inventory. The Accounts Receivable account is debited for the selling price of the item. The Sales Revenue is credited in the same amount. The Cost of Goods Sold is debited for the purchase price of the item, and the Inventory account is credited for the same amount. Once the transaction is recorded in the accounting records, all the affected accounts will have updated balances.