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Why are sales a credit?

Author:
Harold Averkamp, CPA, MBA

Definition of Sales

In accounting, sales are revenues earned when a company transfers ownership of its goods to its customers. Under the accrual basis or method of accounting, the sale occurs when the company has completed the required tasks. When customers are allowed to pay at a later date, the company records the sale with a debit to Accounts Receivable and a credit to the revenue account Sales.

The Sales account is a temporary account used to keep a tally of the sales made during an accounting year (and will be used in preparing the company’s income statement). However, sales have the effect of increasing a sole proprietorship’s credit balance in the owner’s equity section of the balance sheet, or a corporation’s stockholders’ equity section. (After the accounting year is completed, the credit balance in the Sales account will be moved via closing entries to the corporation’s Retained Earnings account, or to the sole proprietorship’s Owner’s Capital account.)

Example of Crediting Sales

Recall that asset accounts normally have debit balances and the liability and stockholders’ equity accounts normally have credit balances. To confirm that crediting the Sales account is logical, think of a $100 cash sale. The asset account Cash is debited for $100 and therefore the Sales account will have to be credited for $100. Also the accounting equation will remain in balance because the asset Cash is increased $100 with a debit, and through the closing entries the owner’s or stockholders’ equity account will be increased with a credit of $100.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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