Accounting for sales/sales return is simple and straightforward. There are two possible scenarios when you make sales. The sales may be on credit and on cash as well. If the sales in on credit, the following journal entry will be posted in the books of accounts.
| Description | Debit | Credit |
| Accounts receivable (asset) | XXX | |
| Sales | XXX |
The debit impact of this transaction is recording for the accounts receivable. It’s because of the fact that this sale has brought the right to receive cash/economic benefits in the near future. It’s about recording the asset in the financial statement.
So, once you have recorded receivables, there are two possible scenarios, you might receive cash/economic benefit in the future or you may have to provide provision and write off finally. So, if you have received cash, journal entry will be posted as follows,
| Description | Debit | Credit |
| Cash | XXX | |
| Accounts receivable (asset) | XXX |
The debit impact of this transaction is recording for the cash as it has been received in actuality. On the other hand, the credit impact of this transaction is the removal of the accounts receivable/right to receive economic benefits. It’s because the right to receive economic benefits has been realized.
However, when receivable is overdue and you expect it’s difficult to be realized. In this situation, a provision is made for the receivable with the following journal entry.
| Description | Debit | Credit |
| Expense (profit and loss account) | XXX | |
| Provision for accounts receivables | XXX |
The debit impact of this transaction is recording for the expense. It’s because you expect that economic benefit is to be wasted. Hence, you need to record it as an expense. On the other hand, the credit impact of this transaction is a creation of provision (temporary balance to adjust receivable in the balance sheet). This amount is deducted from the gross balance of accounts receivables.
It’s important to note that the provision is a temporary account, you can reverse this balance if the receivable is realized in the future. The following journal entry is posted.
| Description | Debit | Credit |
| Provision for accounts receivables | XXX | |
| Expense (profit and loss account) | XXX |
The debit impact of this transaction is a reversal of provision in the balance sheet as it’s no more needed. On the other hand, the credit impact is a reversal of the expense that was recorded at the time of recording provision.
However, once you make a provision and do not expect payment in any case. In this scenario, you will need to write off the receivable by using the provision already provided for. In this case, the following journal entry will be posted in the books of account.
| Description | Debit | Credit |
| Provision for accounts receivables | XXX | |
| Accounts receivable | XXX |
The debit impact of this transaction is the removal of the provision balance on the balance sheet. It’s because we are going to utilize this balance in writing off the receivable balance. On the other hand, the credit impact is the removal of the account receivable from books.
So, we have covered accounting when you make cash sales, and credit sales. Sometimes, there is a sales return, in this case, the following journal entry is posted in the books.
| Description | Debit | Credit |
| Sales return (profit and loss account) | XXX | |
| Accounts receivable/Cash | XXX |
The debit impact of this transaction is the removal of the sales from the profit and loss account. It’s because the customer has returned us and we have to pay them back. On the other hand, credit impact is the removal of accounts receivable from the books. Further, it’s important to note that if the sale was made in cash, the business needs to pay back the cash and record it on the credit side.
Conclusion
The accounting for the sales is simple. There are two possible scenarios for the sales, it may be cash sale and credit sale. In the case of cash sales, the debit is cash and credit is sales. On the other hand, if sales is on credit, the sales is credit and receivable is debit. However, if there is a sales return, the entry has to be reversed.
