Sold inventory on account journal entry

Introduction

In business, we may need to sell our inventory on account to some of our customers as it is a good way to increase our sale volume. In this case, we need to make the journal entry for the sold inventory on account even though we have not received the cash payment yet.

Under the accrual basis of accounting, we need to record the revenue during the period that we have earned it regardless of when the cash is received. Likewise, we need to make the journal entry for the inventory sold on account at the time when we make it. This is to record the sales revenue that we have earned as well as to recognize our right to receive the cash payment in the near future.

Later, when we receive the cash payment for the inventory sold on account, we can make another journal entry to clear the customer’s account from our receivables.

Sold inventory journal entry

We can make the journal entry for sold inventory on account by debiting the accounts receivable and crediting the sales revenue account.

This journal entry for sold inventory on account increases both total assets on the balance sheet and total revenues on the income statement.

Later, when we receive the cash payment for this sold inventory on account, we can make the journal entry with the debit of the cash received and the credit of the accounts receivable as below:

This journal entry is made to clear the accounts receivable we have recorded previously when we made the sale of the inventory on account to our customer.

Sold inventory on account example

For example, we usually sell our inventory on account to our customers that have a close business relationship with us. Likewise, on June 30, we make $1,000 of inventory sales on account to one of our customers.

Later, on July 20, the customer pays us $1,000 for this sold inventory on account that we have made on June 30.

In this case, we can make the journal entry for sold inventory on account by debiting the $1,000 amount into the accounts receivable and crediting the same amount into the sales revenue account on June 30 as below:

June 30:

In this journal entry, there is an increase of $1,000 in both total assets on the balance sheet and total revenues on the income statement by June 30.

Later, on July 20, when the customer pays us the $1,000 amount to settle their account, we can make the journal entry to clear the $1,000 accounts receivable as below:

July 20:

This journal entry is made to eliminate the $1,000 accounts receivable that we have recorded when we sold inventory on account to our customer on June 30.

Cost of goods sold for selling the inventory

There may be a different treatment for the cost of goods sold from one company to another when the inventory is sold. Specifically, the companies that use the perpetual inventory system will have a different treatment for the inventory (e.g. sold or purchased) to those that use the periodic inventory system.

Likewise, it may be important to note the difference between the perpetual inventory system and the periodic inventory system when we make the sale of inventory on account above.

Perpetual inventory system

If we use the perpetual inventory system, we will also need to make the journal entry for the cost of goods sold when we make a sale of the inventory. So, we also need to record the cost of goods sold when we make the journal entry for the sold inventory on account above.

The journal entry for the cost of goods sold is the debit of the cost of goods sold account and the credit of the inventory account.

The cost of goods sold account in this journal entry is an income statement account in which its normal balance is on the debit side. On the other hand, the inventory account is a balance sheet account in which its normal balance is also on the debit side.

Likewise, this journal entry will reduce the balance of the inventory by the amount that is recorded as a cost of goods sold in the income statement.

For example, if a $1,000 of the sold inventory on account that we have made to one of our customers in the example above has the cost of $700, we need to also make the journal entry for the cost of goods sold on June 30 as below:

Periodic inventory system

On the other hand, if we use the periodic inventory system, we only record the cost of goods sold after we have performed the physical count of the inventory. This usually happens at the end of the accounting period when we need to close the year-end account.

Hence, there is no journal entry of the cost of goods sold at the time that we make the inventory sale. Likewise, there is only the journal entry for the sold inventory on account above if we use the periodic inventory system.