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Accounting for Inventory Sales

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  • 0:02 Sales Defined
  • 0:30 Types of Sales
  • 1:36 Accounting for Sales
  • 3:49 Recording Sales on Account
  • 6:18 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

In order to operate, a business must make sales. In this lesson, we are going to discuss sales of inventory. You will learn the types of sales made, the items that affect sales profit, and the way to record sales in the accounting records.

Sales Defined

The goal of any merchandising operation is to make money. But in order to do that, two things have to occur - purchases and sales. In this lesson, we're going to talk about the sales portion of a merchandising business. Though I'm sure you already know what sales are, I'm going to take the time to define that term. Sales are the transfer of ownership of goods between a merchant and a customer for money.

Types of Sales

There are two types of sales that occur in the merchandising world. Cash sales are sales that are made where payment is received immediately. For example, let's say that I go to the furniture store and buy new living room furniture. The total cost of the furniture is $2500, and I pay that at the time of the sale. I have created a cash sale.

Credit sales , also known as sales on account, are sales that are made on specific terms with payment being expected at a later date. In this case, let's say that instead of paying for the furniture at the time of purchase, I open a store credit account and I make monthly payments to the furniture store until the furniture is paid in full. In this transaction, I have created a credit sale. Now, each credit sale that occurs within a business creates what is known as an accounts receivable within the business. An accounts receivable is money that is owed to a business for goods or services purchased by a consumer and paid for over time and in terms set forth by the seller.

It is important to note here that when we talk about cash sales, that includes items paid for with commonly used credit cards like Master Card and Visa. Accounts receivable arise from the use of store credit cards when used for payment.

Accounting for Sales

In order for a company to be able to accurately report its financial position on the company financial statements, it has to account for every transaction that occurs in the business, including sales. Before sales transactions can be recorded, there are a few things that have to be taken into consideration.

One thing that needs to be taken into consideration when it comes to recording sales are any sales returns and allowances that have occurred in the specific time period. Sales returns and allowances are either merchandise that has been returned by a customer or allowances given to a customer because of defective merchandise. Now, what if I decided that of the furniture that I bought, I wanted to return the arm chair because it didn't fit in my living room? In that case, my account at the store would be credited for the purchase amount of the chair, and the amount of net sales for that transaction would decrease. Once again, if there are any credits or allowances given, they're deducted from the sales total.

Another concept that is important in regards to inventory sales is the cost of goods sold. The cost of goods sold is the dollar value associated with inventory items that have been sold. This amount is NOT the amount that the merchandise sold for. It is the amount that was paid for the merchandise, including any associated costs such as shipping, receiving, and storage cost. Why is cost of goods sold important when accounting for inventory sales? Well, the answer to that is pretty straightforward. Whenever a sale of merchandise is made, the cost of that merchandise that was sold has to be deducted from the proceeds from the sale to get the amount of profit that was made by the sale.

Recording Sales on Account

Now that you know a little more about sales, let's talk about how these sales are recorded in the accounting records. Any transaction that is posted in an accounting journal requires a debit to at least one account and a credit to at least one account. Now, when it comes to sales of inventory, there are actually two entries that must be made into the accounting system. The first entry records the actual sale with a debit entry to an asset account and a credit entry to a revenue account. The second entry requires a debit to the cost of goods sold account and a credit entry to the inventory account. This allows the accounting records to show the amount of sales that were made, the cost of the goods that were sold in each transaction, and the value of the inventory that must be removed from the store inventory for each transaction.

Recall the furniture that I bought earlier and paid cash. Let's assume that the cost of the furniture was $2000. Now, notice that wasn't the sale price; that's the cost of the furniture. That journal entry would look like this:

Account Debit Credit
Nov 1 Cash $2500
Sales Revenue $2500
Nov 1 Cost of Goods Sold $2000
Inventory $2000

Cash would be debited $2500, sales revenue would be credited $2500.
Cost of goods sold would be debited $2000; inventory would be credited $2000.
That's two separate journal entries.

But what if I didn't pay cash, and instead I chose to open a store credit account? Would that entry look any different? Of course it would; it'd look like this:

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