When customers buy products on credit or on account, the transaction is recorded in accounts receivable. In the following practice questions, you are asked to record purchases made on account, both with and without a down payment.
Practice questions
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A company makes a $25,000 sale on account. The company expects that $10,000 will be collected within a week and the balance within a month. What is the proper entry to record the transaction at the time of sale?
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A company makes a $30,000 sale on account but with a 10% cash down payment. What is the proper entry to record this transaction?
Answers and explanations
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Debit accounts receivable $25,000 and credit sales revenues $25,000
Both accounts receivable and sales revenues increase $25,000 as a result of the sale. The expected collection pattern doesn't impact how the original sale is recorded. Therefore, both accounts receivable and sales revenues need to be increased by a debit to accounts receivable and a credit to sales revenues.
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Debit cash $3,000, debit accounts receivable $27,000, and credit sales revenue $30,000
The company makes a sale of $30,000 and receives a down payment of 10%. First, you need to calculate the amount of the down payment by taking the total sale of $30,000 and multiplying by the percentage of down payment, or 10%. Based on that, the down payment amount is $3,000. This is the amount of cash the company receives, so it should be recorded as a debit to cash for $3,000.
Next, you need to determine the outstanding balance. You calculate the balance due as the total sale amount of $30,000 less the amount of the down payment of $3,000, to give $27,000. The outstanding balance of $27,000 represents accounts receivable and should be recorded as a debit to accounts receivable. Now you have a debit to cash of $3,000 and a debit to accounts receivable of $27,000. To make the entry balance you need a credit of $30,000, and it should be recorded to sales revenue to record the revenue earned on the transaction.
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