Sale of Inventory on Account

If as a business you make a sale of inventory on account to a customer, then the goods are sent to the customer before payment is made. The customer owes your business for the goods and the amount owed is called an accounts receivable or a trade debtor.

Suppose for example, the business makes a sale of inventory on account for the amount of 3,000, then the journal entries will be as follows.

Journal Entry for Sale of Inventory on Account

The accounting records will show the following bookkeeping entries for the sale of inventory on account:

Journal Entry for Sale of Inventory on Account
Account Debit Credit
Accounts receivable 3,000
Sales revenue 3,000
Total 3,000 3,000

Sale of Inventory Bookkeeping Entries Explained

Debit
The customer owes you money for the goods until they are paid for. The business now has an asset (accounts receivable) for the amount due.

Credit
A sale of inventory is made, the asset of inventory is reduced, and the revenue is taken to the income statement

The Accounting Equation

The Accounting Equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the owners equity in the business This is true at any time and applies to each transaction. For this transaction the accounting equation is shown in the following table.

Sale of Inventory on Account Accounting Equation
Assets = Liabilities + Owners Equity
Accounts receivable = None + Sales revenue
3,000 = 0 + 3,000

In this case one asset (accounts receivable) increases representing money owed by the customer, this increase is balanced by the increase in owners equity. The credit to the income statement for the sale increases the net income, which increases the retained earnings, and therefore the owners equity in the business.

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