When to Record Accounting Sales
First, let's make sure we are talking about the same kind of accounting sales. There are gross sales and net sales. Gross sales are calculated by adding the total amount received by the purchaser. ...
First, let's make sure we are talking about the same kind of accounting sales. There are gross sales and net sales. Gross sales are calculated by adding the total amount received by the purchaser. Net sales subtract the cost to make the product from the gross sales figure. Other subtractions are made as well, like product returns and discounts not settled at the time of sale. There is, obviously, a big difference between the two.
Now that we understand two broad types of sales, the sale of a product or service may be recorded at different times. In cash accounting, sales are recorded when the transfer of money and product are complete. In accrual accounting, sales are recorded when the agreement has been made or the order has been placed.
When using cash accounting, a record of a sale is not kept on the ledger until cash is physically obtained. An alternative method of recording the transaction must be used. It still should be written down at the time of the sale agreement. There may be a separate book or just a compilation of receipts, but sales must be recorded somewhere even if full payment is not received at the time of transaction. Accountants and controllers consider this a contract that is only an agreement for a purchase. Once all the cash is received, however, the records are easily transferred to the income statement, cash flow statement, and/or balance sheet.
In accrual accounting, sales orders are directly reported to the income statement. Since the sales are counted as revenue at the time of the purchase agreement, sales that have been placed, but not filled are usually referred to as outstanding orders. As stated earlier, these sales are already marked as income, so this tag is very important to make sure that money is actually collected. If this note is not properly written, there isn't any notification that payment was not received. If this occurs, not only will the company lose money, but the books will show the debts collected and will not be able to track where the loss is coming from.
Regardless of cash or accrual accounting, whenever dealing with an income statement, sales are recorded as net sales, not gross sales. This is a general rule and should be clarified if there is doubt as to net or gross.
Using double-entry bookkeeping makes recording sales and payments much easier, mainly because it is a more in-depth method of accounting. This process records debits on one line and puts credits on the next line. This is beneficial because a purchase agreement or contract can be listed on one line and the line directly below it can be left blank until payment is physically received.
When the accounting sales are recorded depends on the preferences of the controller regarding the business type, procedures, inventory, etc. There are several bases to make sure are covered in each method. Keeping a sloppy ledger increases the chance of losing money and not even knowing it.
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ABOUT THE AUTHOR
Joe Coffee is an entrepreneur for the online marketing firm, Web Shepherd. He writes about small business accounting options and tips about leading methods of accounting.