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Cash sales debit or credit?

Sales are part of the revenue a company makes and is usually recorded on the company’s income statement. When companies make sales, they can be either in cash or on credit. The amount of sales companies make adds to the overall success of their business especially when these sales are paid for in cash.

This is because, unlike credit sales which have the potential of becoming bad debt when the customer fails to pay up, cash sales add to the company’s cash flow and assets. Hence a lot of companies prefer cash sales and even adopt various marketing strategies to increase their cash sales.

When recording cash sales, two accounts are involved; the cash account and the sales account. Here, we shall buttress the meaning of cash sales and also discuss debit and credit so that we can ascertain if cash sales is a debit or credit.

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Understanding cash sales debit or credit

Cash sales explained

Cash sales is a sales transaction where the customer pays for the goods or services at the time when they receive the goods or services. This means that the payment is made on the spot upon purchase. Although the generic term for sales transactions that are settled immediately is cash sales, it does not necessarily translate to the customer paying with dollar notes.

Cash sales also encompass payments using cards, cheques, direct bank transfers, and cryptocurrency. For card payments, the sales amount is deducted from the customer’s account and credited to the company’s account. Cheques can be deposited into the company account. The customer can make a direct transfer of the amount or pay using cryptocurrency.

What is essential with cash sales is that the payment is made immediately and it eliminates the need for the company to extend credit to the customer. Companies mostly prefer this method of payment due to the following reasons:

  1. Cash sales cancel out the risk of unpaid accounts, otherwise referred to as bad debts which are commonly associated with credit sales.
  2. The company’s assets (cash) increase through cash sales.
  3. The company saves the time and resources that would have been spent on trying to retrieve the accounts receivable from the customers who got goods or services on credit.
  4. By paying for the goods or services on the spot, the accounts are settled at once and the customers get full possession of the goods or services bought.
Cash sales debit or credit?
Cash sales debit or credit?

Accounting for cash sales: debit and credit

When it comes to accounting for transactions that occur in a company, the most commonly used accounting method is the double-entry bookkeeping method. Using this method, two or more accounts are most commonly used with a debit to one account and credit to another account.

How a debit or credit affects an account depends on what type of account it is. The cash sales account is a revenue account; it adds to the company’s current assets. A debit to the cash account increases it while a credit decreases it. A debit decreases the sales account while a credit increases it. A debit is made to the cash account while the sales account is credited. The debit to the cash account increases the company’s current assets while the credit to the sales account increases the amount of revenue earned by the company.

One of the most often recorded accounting transactions for companies that sell products is cash sales. This journal entry includes a debit to cash and a credit to sales account. The same amount debited to the sales account will be credited to the cash account.

For example, if Mr. Jack bought products worth $20,000 from Aliexpress which he paid for in cash, Aliexpress will record the cash sales as follows:

Debit and credit journal entry for cash sales

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Is cash sales debit or credit?

When a sale is made and the customer pays for the goods or services received on the spot, the cash account is debited and the sales account is credited. Therefore, the cash sales are a debit to cash and a credit to sales.

Cash sales debit or credit: Journal entries

  1. Cash sales of goods
  2. Cash sales of services

When companies generate revenue through the sale of either goods or services, they need to report the transaction in their financial books. This is done in order to keep accurate records that can be referred to in the future and which are also useful when investors want to find out how much revenue a company was able to generate within a stipulated time frame.

Furthermore, these records are useful for reporting and filing purposes and are also useful in ascertaining the financial standing of a company. The basic journal entry for cash sales involves a debit to cash and a credit to sales. The journal entries for cash sales vary, this is dependent on whether the cash sale was for goods or services. Additionally, if there is a tax liability, it will also add to the journal entry. Below we shall have a look at how journal entries are made for goods and services by companies.

Cash sales of goods

When accounting for cash sales for goods, cash and cost of goods sold are debited while the inventory and sales accounts are credited. The debit to cash represents an increase in the company’s cash since the good was paid for on the spot. The debit to cost of goods sold is made since expenses were incurred in the production of the goods that were purchased by the customer.

The cash sales further increase the company’s revenue, hence the credit to the sales account. The credit to inventory reduces the company’s inventory since the sale represents a reduction in the inventory balance after the sale of the goods to the customer. Additionally, there will be a credit to the sales tax account if the good sold is liable to taxation. The tax amount is usually an addition to the price of the good and is often paid by the customer. The company remits the tax to the government later.

For example, if Miss. Johnson buys a couch from Stickley which costs $97 and pays in cash. If it costs the company $77 to make the couch, the journal entry will look similar to the one below if there is no tax liability for the sale.

Cost of goods sold$77
Journal entry for cash sales of good that has no tax liability

Continuing with the example above, if the couch is liable to a 7% Value Added Tax (VAT), then the journal entry will include a credit to the tax account and will be as follows

Cost of goods sold$77
Journal entry for cash sales of good that has a tax liability

Cash sales of services

Recording the cash sales for services rendered is quite straight forward with a debit to the cash account and a credit to the sales account.

Assuming Mr. Alfred hired CleanNet USA to clean his office. If the service cost $50 and he paid through a bank transfer, the journal entry will be recorded as follows

Journal entry for cash sales of services without tax

Assuming the service includes a tax of $5, then, the journal entry will look like the one below

Sales tax payable$5
Journal entry for cash sales of services with tax

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Is cash sales debit or credit? We have seen that the cash sales are a debit to cash and a credit to sales which increases both accounts. Cash sales are transactions for goods or services where the company or seller receives payment on the spot from their client. Companies value cash sales and often prefer them to credit sales since it adds to the cash they have at hand and save them the time and effort required with following up on credit sales.

Companies should try their best to maximize and increase their cash flow by encouraging customers to make cash payments instead of credit purchases. This will aid in reducing a company’s bad debt to the barest minimum.

With the numerous advancements in technology which has led to the blurring of boundaries between states, countries, and whole continents, cash sales have evolved beyond the payment of dollar bills but have been broadened to include bank transfers, card payment, cryptocurrency, cheques, etc. But in order to keep the accounting for these various payment methods as easy and uncomplicated as possible, they are all recorded as a debit to cash and credit to sales provide the payment was made on the spot.