Posting sales transactions may feel easy for an accountant with average knowledge. However, for starters, this may seem difficult. More so with IFRS 15, there are other events relating to revenue, the double entry for this is more than simply debiting trade receivables and crediting sales accounts.
What you should know about sales transactions
Sales refer to the revenue earned from a company’s normal business activities. Therefore, if a business is into car dealing. The sale of a car is classified as revenue. However, the sale of the CEO’s car is not revenue. Rather, it is a disposal of an asset. Sales can be made in cash or on credit.
Cash sales imply that the customer makes an immediate payment, either in cash, by cheque, through a merchant online platform, or by bank transfer. By ‘immediate’, we mean that as the title to the goods is transferred, cash payment is made.
Credit transactions enable customers to defer payment until a later date. Payments made on another day for a sale of goods cannot be regarded as sales. It is a payment for credit sales by the debtor (accounts receivable).
Let’s illustrate these. Mr Michael sold goods to Miss Bimbo and Mr Tobe for N700,000 and N350,000 respectively. Mr Tobe made payment as he received the goods. But Miss Bimbo postponed payment for one week. Mr Tobe makes a cash transaction while Miss Bimbo makes a credit transaction although he made a payment in a week.
Accounting principles that guide sales transactions
The accounting concept used as a guide when determining when a sale is made is the realisation concept and the International Financial Reporting Standards, IFRS 15 (Revenue with contract with customers). The accounting standard provides more details on how sales should be recognised generally and specifically in certain industries.
The realisation concept was explained in a previous article. However, in summary, it means that revenue is recognised as soon as the title to the goods has passed to the other party or services have been rendered. It does not matter if payment is received immediately.
IFRS 15 provides a five-step model for recognising revenue when posting to journals or ledgers and recognition in the statement of financial performance. The summary of the model is:
1. Identify the contract(s) with the customer
2. Identify the separate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when or as an entity satisfies performance obligations
A transaction will be recognised as revenue if and only if it meets the five-step model criteria.
Double entry for sales transactions
Cash transactions
For cash transactions, the double-entry is
Dr: cash/bank account
Cr: Sales account.
With the cash paid
For example, a sale of goods worth 4 million Naira to Oluwaseyi for cash is a debit and a credit to the bank and sales accounts respectively with N4,000,000. Here the name of the customer is not required because he made a payment immediately. The customers’ names will be necessary for qualitative decision-making and not necessarily for ledger or journal postings.
Credit transactions
For credit transactions, the double entry is to:
Dr: Account receivables
Cr: Sales a/c.
With the value of the sales
To illustrate, a sale of goods of 7 million Naira on credit to Miss Ugwu is a debit posting to Miss Ugwu’s account and a credit to sales with N7,000,000. Note that Miss Augwu is an accounts receivable.Notice the use of the individual customer’s name when a credit sales transaction occurs.
However, for goods sold on a cash basis, the name was omitted. The reason for the name in credit sales transactions is to have evidence of debt owed by the customer. It helps in tracking debts and their collections.
Another reason is that when payment is made by the customer, his/her account can be duly credited. To illustrate, if Miss Ugwu pays five million Naira, it will reflect in her account with a balance of N2,000,000. So, the company is aware of the unpaid balance of N5 million.
Advance payment for sales
There are situations where payments are made in advance before goods or services are processed and delivered. When this occurs, the amount cannot be recognised as a sale transaction although it can have been collected.
The realisation concept explained that sales are recognised when goods are delivered and it doesn’t matter whether payment is made or not. Also, IFRS 15 states that revenue is posted in the books of account when the business has completed the performance obligation.
If a performance obligation is completed in stages, revenue must be recognised in stages as well. When payment is made for goods or services not delivered, the double entry is to:
Dr: Cash/Bank account
Cr: Contract Liability
With the amount paid in advance
For example, Mr Kola contracted Toby Ltd to supply fried rice at a party. He paid two million in advance of the total sum of N3 million. The double entry shall be to debit Bank a/c and credit contract liability. When the goods are delivered at the party, Toby Ltd can debit contract liability and credit sales account with the sum of N2,000,000.
If the balance of 1 million Naira is paid on delivery, debit the bank account and credit sales. However, if the balance is postponed to a future date, debit Mr Kola’s account and credit sales. When the payment is made in the future date, debit the bank account and credit Mr Kola’s account.
To conclude, sales or revenue are an important aspect of a business. It is what brings money into the entity. Therefore, accurate postings are important to reflect the true value of revenue to the entity. Wrong postings will lead to incorrect decision-making by management.