Lesson 31 - Beginner accounting course

31. Recording Sales Transactions: Cash vs. Credit Sales

Sales transactions are a fundamental part of any business, and they can be categorized into two main types: cash sales and credit sales. Understanding how to properly record these transactions ensures accurate financial reporting and compliance with accounting standards.

Cash Sales

A cash sale occurs when a customer pays for goods or services immediately at the time of the transaction. Payment can be made using cash, a check, or an electronic transfer. Since there is no delay in receiving payment, cash sales do not create any accounts receivable.

When a business records a cash sale, the revenue is recognized immediately, and cash is increased. If the sale includes sales tax, that amount must also be recorded separately.

Example: Cash Sale with Sales Tax

A business sells a product for $1,000, and a 10% sales tax applies. The customer pays in cash.

Credit Sales

A credit sale occurs when a business allows a customer to purchase goods or services on account, meaning the customer agrees to pay at a later date. This creates an account receivable, which represents money owed to the business.

Unlike cash sales, credit sales involve a risk of non-payment, and businesses must track outstanding invoices. They may also offer discounts for early payments.

Example: Credit Sale with Sales Tax

A business sells goods for $2,000 on credit, with a 10% sales tax. The customer will pay in 30 days.

Later, when the customer makes the payment:

Key Differences Between Cash and Credit Sales 

Accurate recording of cash and credit sales helps businesses maintain proper financial records, manage cash flow, and assess the creditworthiness of their customers. It also ensures compliance with revenue recognition principles under GAAP and IFRS.