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:
Sale of Inventory Bookkeeping Entries Explained
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.
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.
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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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.