A credit sale under a perpetual inventory system needs two entries: debit Accounts Receivable and credit Sales; debit COGS and credit Merchandise Inventory.
Key takeaways
- Pull the selling price from the invoice and the cost from the stock record.
- Prepare both entries together, keeping selling price and cost apart.
- Check that each entry balances and the stock count agrees.
- Record the later payment without posting the sale again.
Owners and staff who record only the sale amount end up with books that show too much stock and too much profit, and the error stays hidden until someone counts the shelves.
This post follows the work in the order you would do it. The worked example comes from the OpenStax textbook Principles of Accounting, Volume 1: Financial Accounting, in its section on recording sales of merchandise under the perpetual inventory system. A perpetual inventory system keeps the stock account updated as each sale happens, instead of waiting for a count at the end of the period. That fits a shop that tracks each item as it moves, which is the setting this post assumes.
The textbook's example is a business called CBS selling desktop computers. Your shop will have its own products and its own numbers, and the names of your accounts may differ from the ones used here. The shape of the entries stays the same. Once you see why each line is there, you can apply the same pattern to a box of parts, a pallet of paint, or a case of cleaning supplies.
Each step below ends with something you can check. Do not move on until the check passes. A mistake caught on the day of the sale is usually quick to fix. The same mistake found months later means tracing it back through invoices, stock counts, and payment records.
Step 1: Pull the sale details before you post
Take the price from the invoice you sent the customer. Take the cost from your stock record for the units that actually left the shelf, not from a price list or from memory.
The textbook example gives all four facts in plain sentences. At $750 each, the sale is worth $15,000. At $400 each, the stock cost $8,000.
Two details in this step need checking. The first is the date: the example's sale and invoice are dated July 7. The second is the cost. If the cost figure comes from a rough estimate, or from the most recent purchase when the units sold came from older stock, the cost entry will be wrong even though the sale amount is right. Use the cost your records assign to the units you sold. If costs changed between purchases, ask your bookkeeper which costing method the shop follows, so every sale is priced the same way. For help checking those records, see how to value a stock count.
Check the arithmetic before moving on. The sale amount should equal the quantity times the selling price, and the cost should equal the quantity times the unit cost. If either figure does not match the paperwork, fix it now.
Also look at the invoice line by line. If one invoice covers several products, check each product's quantity, selling price, and recorded cost before calculating the totals. Keeping the product details makes the stock count easier to check later.
Step 2: Set up the accounts you will use
You will work with four accounts. Accounts Receivable holds the amounts customers owe you for goods they have taken but not yet paid for. Sales holds the selling price of the goods you have sold. Merchandise Inventory holds the cost of the stock you still have on hand. Cost of Goods Sold, usually shortened to COGS, holds the cost of the stock you have sold.
The quoted entries in the textbook show which side moves each account. Write these four lines on a sheet of paper and keep it near the sales counter, so anyone posting a credit sale can see which account takes which side.
In the example, the inventory account is named Merchandise Inventory-Desktop Computers. That name shows that the inventory is split by product line. If your shop carries several kinds of stock, a separate inventory account for each kind lets you check a single product's books against its shelf count. A single inventory account for everything can work, but it becomes hard to reconcile when you have a dozen product lines and one of them is out of balance.
Make sure the account names in your own books match what you intend to use. Staff who see "Inventory" in one report and "Merchandise Stock" in another will eventually post to the wrong one. Pick the names once, write them down, and use them the same way every time.
Step 3: Post the first entry at the selling price
The first entry records the sale at what you charged the customer. The textbook states the reason plainly: Since the computers were purchased on credit by the customer, Accounts Receivable increases (debit) and Sales increases (credit) for the selling price of the computers, $15,000 ($750 × 20).
Written as lines in your journal, the entry reads:
July 7 Accounts Receivable ........... debit 15,000
Sales ......................... credit 15,000
The debit to Accounts Receivable is the customer's promise to pay. Nothing has been paid yet, so no cash account appears in this entry. This is what separates a credit sale from a cash sale at the counter. In a cash sale, the debit goes to cash. In a credit sale, the debit goes to receivables, and the cash arrives only when the customer pays.
The credit to Sales is the revenue from the sale, and in this example it is the full selling price, $15,000. The shop has earned that revenue on the invoice date, even though the customer has not paid. The receivable is the record of what is still to come in.
The mistake to watch for here is putting the cost on this line, or posting the sale amount at cost. Keep the selling price and the cost apart. Mixing the two is easy when staff are busy at the counter, which is why the two entries should be prepared together from the same invoice.
Check the result before moving on. The customer's balance should now show $15,000 owed, and the sales account should have risen by $15,000. If either number is off, correct the entry before you post the cost.
Step 4: Post the second entry at cost
The second entry records what the stock cost you. The textbook sentence reads: In the second entry, Merchandise Inventory-Desktop Computers decreases (credit), and COGS increases (debit) for the cost of the computers, $8,000 ($400 × 20).
Written as lines, the entry reads:
Cost of Goods Sold ..................... debit 8,000
Merchandise Inventory-Desktop Computers
credit 8,000
Why does this entry matter so much? Without it, the sale shows revenue, but the stock stays on the books at full value. The inventory figure would be too high, because twenty computers have left the shop. The profit would also be too high, because the cost of the goods sold would be missing from the expenses. An owner who looks at those books to decide whether to reorder, discount, or buy more stock would be deciding from numbers that describe stock the shop no longer has.
The cost is not the selling price, and it should not be worked out as a markup or a percentage. Those two numbers come from separate sources: the purchase record and the sales invoice. Pull each from its own document, so the cost entry does not depend on what the sales price happened to be.
Keep the cost entry as its own pair of lines, even when the same person posts both entries at once. Do not combine the two into one line. Each entry has a specific job. The first says what the customer owes. The second says what the stock left the shop at. If you combine them, the receivable and the inventory balances can no longer be checked against the invoice and the stock record on their own.
Check the result before moving on. COGS should show $8,000 for this sale, the inventory account should be down by $8,000, and the stock count for that model should be down by twenty units.
Step 5: Check the two entries against each other
Once both entries are posted, compare the debits with the credits within each entry. Each entry must balance on its own, with the debit side equal to the credit side.
The first entry balances because the $15,000 debit to Accounts Receivable matches the $15,000 credit to Sales. The second entry balances because the $8,000 debit to COGS matches the $8,000 credit to Merchandise Inventory. If either pair does not match, one line has the wrong amount, and you should find it before going further.
The gross profit on this sale is the selling price less the cost, $15,000 minus $8,000. That result comes before the other costs of running the shop, such as rent, wages, and delivery. It tells you what the sale contributed on its own, and it is the number to compare against your expected margin on that product.
Next, check the stock. Twenty computers left the shelf, so the stock count for that model should fall by twenty. If your physical count shows a different number, the cause might be a sale that was never recorded, a unit that was moved to another location, or a count that was taken wrong. Find the cause before the next count, because each unexplained difference makes the stock figures less useful. Follow the physical inventory reconciliation steps when the count and records differ.
Last, check the customer account. The customer owes $15,000 under the invoice dated July 7. Compare that figure against the invoice itself, not against your memory of the phone call or the order form. If the invoice total and the receivable differ, correct the entry before the customer receives a statement.
Illustrative example: Check a smaller credit sale
Suppose an illustrative sale has a selling price of $400 and a recorded stock cost of $300. Debit Accounts Receivable $400 and credit Sales $400. Then debit Cost of Goods Sold $300 and credit Merchandise Inventory $300. Each pair balances independently. Check the receivable against the invoice and the inventory reduction against the cost record before moving on.
Step 6: Record the payment without posting the sale again
The example customer pays later. On July 17, the customer makes full payment on the amount due from the July 7 sale. No discount was offered with this transaction; thus the full payment of $15,000 occurs. The payment therefore closes the receivable completely.
The payment is its own event, recorded on the day the money arrives. It reduces the amount owed in Accounts Receivable. It does not create a new sale, and it does not create a new cost. This is an easy place to slip. Posting the sale again would double the revenue, and posting the cost again would remove stock that has already left the shop.
The date gap is worth noting. The payment comes on July 17, ten days after the July 7 invoice date. Between those two dates, the receivable stays open and shows up on any list of amounts customers owe. If a customer pays late, the balance stays on that list until the money arrives, so a regular look at open receivables is the way to catch it.
Discounts and partial payments change the payment record, not the sale entries. If you offer a discount, or the customer pays only part of the amount, the difference is best handled in the payment record. That way the original sale entries still match the invoice, and anyone reading the books can see what was sold and what was actually collected.
Once the payment is posted, the receivable for this customer should be zero. Check that the balance clears, and check that the cash or bank record matches the amount that actually reached the shop. If the receivable is zero but the bank shows a different amount, look for a fee, a short payment, or a payment posted to the wrong customer before you assume the books are right.
Step 7: Keep the paperwork and check the totals each month
File the invoice, the cost record, and the payment record together under the sale. Each document backs one piece of the entries. The invoice supports the sales figure and the quantity sold. The stock record supports the cost. The payment record closes the receivable. If an accountant, a lender, or a business partner asks how a number was built, you should be able to trace it from the total back to the invoice without a long search.
At month end, compare the total of open receivables with the Accounts Receivable balance in the books. The two should match. Do the same for inventory. The cost of the stock still on hand should agree with the Merchandise Inventory balance for each product line, and the physical count should agree with the stock record. If they differ, find out why before the next sale goes in. A difference that is left alone tends to grow, because each later entry is built on top of the wrong figure.
Staff who record sales should understand both entries, even if only one person posts everything. Training that covers only the sale amount leaves the cost entry to chance. A shop that does not post the cost will look profitable on paper while its stock quietly runs down, and the owner may not notice until the shelves are empty and the books still show plenty.
Read each entry back against its invoice on the day it is posted. The habit takes a minute, and it catches many of the errors that cause trouble later. Pair that habit with the month-end check, and the books will tell you the truth about what the shop sold, what it cost, and what customers still owe.
Check a credit sale today
Choose one unpaid sales invoice and pull its stock cost record. Compare both entries with those documents, then check the customer's balance and the stock reduction. Correct any mismatch before posting another sale.
Credit sale questions
Why does a credit sale need two entries?
One records the selling price owed by the customer; the other records the cost and removes the stock from inventory. This is the perpetual inventory approach used here.
Does the later payment create another sale?
No, the payment reduces the existing receivable. Check the amount collected against the customer's outstanding balance.
Which cost should the second entry use?
Use the cost your stock records assign to the units sold. Ask your bookkeeper about the shop's costing method if purchase costs have changed.