How to Record a Sale on Account

Making a sale is great, but getting the accounting right is just as important. If you extend credit to your clients—meaning they pay you later for goods or services delivered now—you need to know how to properly record a sale on account. This simple two-step process is a cornerstone of accrual accounting that ensures your financial statements accurately reflect your company's revenue and assets. This article walks you through the manual journal entries, how to handle sales tax, and how to record these transactions in popular accounting software.

What is a Sale on Account?

A sale on account, also known as a credit sale, is a transaction where a business sells goods or provides services to a customer and allows them to pay at a later date. Instead of receiving cash immediately, the business records an Accounts Receivable. This account represents the money owed to the business by its customers and is listed as a current asset on the balance sheet.

This method is fundamental to the accrual basis of accounting, which requires companies to recognize revenue when it is earned, not necessarily when cash is received. By recording the sale when it happens, you create a more accurate picture of your company's financial performance during a specific period. This differs from cash-basis accounting, where revenue is only recorded when payment is in hand.

The two primary accounts involved are:

• Accounts Receivable (A/R): An asset account that increases when you make a sale on credit. It represents what your customers owe you.
• Sales Revenue: A revenue account that increases when you earn money from a sale. This increase in revenue also boosts your company's equity.

The Manual Journal Entry: A Step-by-Step Guide

Understanding the manual journal entry behind a credit sale helps explain exactly what happens in your books. Every sale on account is recorded using double-entry bookkeeping and consists of two main events: the sale itself and the subsequent collection of cash.

Step 1: Record the Initial Sale

As soon as you earn the revenue by providing a product or service, you must record it, even if you haven't been paid. The journal entry recognizes the revenue and establishes the customer's debt to your company.

Your entry will be:

• Debit Accounts Receivable: This increases your assets because you now have a legal right to receive cash from your customer.
• Credit Sales Revenue: This increases your revenue, reflecting the money you have earned.

Example: Let’s say your business, Apex Digital Solutions, designs a website for a client, Main Street Flowers, for $2,000 on March 5th. You send them an invoice with "Net 30" terms, meaning they have 30 days to pay.

The journal entry on March 5th would be:

Journal Entry: March 5

• Debit: Accounts Receivable $2,000
• Credit: Sales Revenue $2,000

To record website design services provided to Main Street Flowers.

At this point, your Accounts Receivable balance has increased by $2,000, showing that you are owed money. Your Sales Revenue has also increased by $2,000, which will appear on your income statement.

Step 2: Record the Cash Payment

Later, when the customer pays their invoice, you need to make another journal entry to show the cash has been received and their debt is settled. It’s crucial not to record revenue again here; the revenue was already earned and recognized in Step 1.

Your entry to record the payment would be:

• Debit Cash: This increases your cash balance, another asset.
• Credit Accounts Receivable: This decreases your Accounts Receivable balance, since the customer no longer owes you that amount.

Continuing the Example: On March 28th, Main Street Flowers pays their $2,000 invoice.

The journal entry on March 28th looks like this:

Journal Entry: March 28

• Debit: Cash $2,000
• Credit: Accounts Receivable $2,000

To record cash payment received from Main Street Flowers.

Now, your Cash account has increased by $2,000, and your Accounts Receivable balance has decreased by $2,000. The net effect is a swap of one asset type (the promise of cash) for another (the cash itself).

Adding Sales Tax to the Equation

Of course, not all transactions are that simple. For most products and services, you'll also need to collect sales tax. The tax collected isn’t part of your revenue—it’s money you owe to the government. Therefore, you must track it in a liability account called "Sales Tax Payable."

When making a sale with sales tax, the initial journal entry becomes a three-part process:

Example: Let's modify your previous example. Say the $2,000 website design is subject to a 7% sales tax rate. The tax amount would be 2,000 x 0.07 = 140.

Your final invoice to Main Street Flowers is now $2,140. Here is how to record that sale:

Journal Entry: March 5

• Debit: Accounts Receivable $2,140
• Credit: Sales Revenue $2,000
• Credit: Sales Tax Payable $140

To record website design service with 7% sales tax.

Here is what happened:

• Accounts Receivable (A/R) is now $2,140. This is the total amount your customer owes you.
• Sales Revenue still only totals $2,000. It's the amount you actually earned.
• You have a new liability account, Sales Tax Payable, with $140. This money is to be paid to the government.

When Main Street Flowers pays their $2,140 invoice, the entry to record the payment will simply debit Cash and credit Accounts Receivable for the full amount of $2,140.

Recording these Transactions on Accounting Software

Thankfully, modern accounting software can handle these debits and credits in the background. It's often as simple as creating the correct transaction—usually an invoice—and the software does the rest. Here's how it works with QuickBooks Online.

QuickBooks Online

QuickBooks Online (QB) makes managing sales on account straightforward. You don't have to worry about manual journal entries; you just create the invoice.

1. Click "+ New" in the top-left corner and select "Invoice."
2. Fill in the Customer Name, Invoice Date, and Terms such as "Net 30."
3. Add your product or service in the "Item Details," including a description, quantity, and rate. This will represent your revenue.
4. Under the "Tax" column, select the tax rate. QB will auto-calculate the sales tax based on your setup.
5. Click "Save and Send."

By sending this invoice, QuickBooks automatically adjusts Accounts Receivable for the full amount, credits Sales Revenue, and tracks Sales Tax Payable accordingly. When you receive the payment, you simply use the "Receive Payment" function to close the invoice and record the cash receipt.

Xero

Xero works in a similar way to QuickBooks, automating the behind-the-scenes entries once you create an invoice.

1. Go to "Business > Invoices."
2. Click "New Invoice."
3. Select the customer and enter the Invoice Date and due date.
4. Enter the line items, including the quantity, price, and any applicable tax rate (for example, "7%").
5. Ensure the Tax Rate is correct for your location.
6. Click "Approve and Email" or save and draft the invoice.

This single action covers all accounting journal entries. Then you can reconcile bank transactions as payments are received, reducing Accounts Receivable balances.

Best Practices for Managing Accounts Receivable

Extending credit increases sales but also leads to managing cash flow, and if you don’t manage your Accounts Receivable effectively, here are some practices to mind:

• Set Credit Policies: Before extending to a customer, define your terms (Net 15, Net 30, etc.), and make it clear how much credit you extend. Communicate these policies upfront and issue statements as necessary.
• Invoice Correctly: Any invoice with incorrect dates, due dates, and described services is likely to create misunderstandings.
• Monitor Your A/R Portfolio: Your Accounts Receivable aging report is crucial to forecasting cash flow. Highlight items nearing overdue. Aging reports can clarify with sections such as "0-30 days," "30-60," and "60+" so you can prioritize collection efforts.
• Follow-Up Consistently: Create a system for reminders and updates if possible. An email when the invoice is one day past due or setting a late-day notice will help sustain cash inflow consistency.
• Be Prepared for Bad Debts: Not every customer will pay. When extending credit, accounts need to be established with estimations to cover a certain amount when revenue fluctuates in questionable situations. Maintain accounts receivables which show the amount expected to be collected with a provision for doubtful debts by providing a bad debt expense account.

Final Thoughts

Recording sales on account using basic journal entries is an essential accounting skill that gives structure to a company's revenue and financial position. Understanding the recording of initial entries to recognize the revenue and the subsequent cash receipt is crucial. Software eases this process, but understanding the underlying mechanisms provides a solid foundation in accounting.

While recording using software, questions about leftover revenue will help when aligning multi-year acceptance so specific liabilities can be met. We utilize a tool like Feather AI to assist in developing networks that can connect and answer complex questions, ultimately saving you time and effort. Feather AI could provide the guidelines creators seek, looking for confidence that you're using a data-backed tool ready to react to various situations.