Recording Your Revenues – What Are You Selling?
When it comes to recording your revenues, what your company sells plays a big part in how transactions are written up. There are basically three things you can sell: products, services, or a combination product and service. The main transaction differences are with cost of goods sold (for products only) and sales tax (which depends on your state’s laws).
No matter what you sell, your journal entries will always have the same foundation. That includes a credit to the sales account and a debit to one of your receipts accounts (either cash or accounts receivable). Those two accounts are certain, for every sale you’ll ever make. For service-only sales, the transaction usually ends there; the only exception is if your company sells in a state that taxes service sales.
With product sales, you may also write up an entry to reflect what you sold. As you’ll see in Chapter 7, every product sale involves inventory moving out the door; when an inventory item is sold, it becomes a cost of that sale. Inventory systems that track the movement of every item all the time, called perpetual inventory, require a product-based journal entry for each sale you make. That means every time you write up a basic sales entry, you also create an entry that debits the cost of goods sold account and credits the inventory account (to show the increase in cost and the decrease in inventory).
ESSENTIAL
When it comes to recording product sales, especially if your company uses a perpetual inventory system, accounting software really earns its keep. These programs create the second entry automatically, as well as updating your inventory item records with every sale.
Sales tax just adds an extra line item (and some extra money) into your basic sales entry. On top of a debit to cash or accounts receivable and a credit to sales, you will have an additional credit to your sales tax liability account. The trick is to make sure your debit entry includes the sales tax amount to keep that entry balanced.