The Sales Accounting Process

Sales form the heartbeat of any business. Every operation in the business works toward the goal of increasing sales and earning a profit. The accounting department records the company’s financial transactions, totals the company’s sales and expenses and calculates the company’s net income. Companies engage in different forms of sales transactions and record each form using different methods of accounting.

Many companies engage in credit sales with their customers. These companies extend credit to their customers, allowing their customers to purchase items or services and pay for the purchase at a later time. Most companies use a sales journal to record credit sales. A sales journal uses a single number column for each transaction. Each transaction lists the date the transaction occurred and the customer name to the left of the number column. The company records the amount of the sale in the number column. The number listed represents an increase in "Accounts Receivable" and an increase in "Sales."

Nearly all companies engage in cash sales with their customers. These companies collect cash from their customers at the time of the transaction. Most companies use a cash receipts journal to record these sales. A cash receipts journal uses a single number column for each transaction. Each transaction lists the date the transaction occurred and a description to the left of the number column. The company records the amount of the sale in the number column. The number listed represents an increase in "Cash" and an increase in "Sales."

Some companies allow their customers to purchase products or services and make installment payments until the bill is paid. The company records these transactions in a general journal. The company records an increase in "Accounts Receivable" and an increase to "Sales" at the time the sale occurs. At the end of the period, the company records an adjusting entry to defer the gross profit recognized as a result of the sale. The unrealized gross profit equals the ending accounts receivable balance times the gross profit percentage. In the general journal, the company records a decrease to "Sales" and an increase to "Deferred Gross Profit."

The company reports all sales revenue, subtracts all expenses and calculates net income on its income statement. The company adds up the credit sales and cash sales reported. The company also adds the revenue recognized in the current year for installment sales.