Question

What effect does a sale on credit have on the following accounts Accounts Receivable, Sales Revenue, Cost of Goods Sold, and Inventory ? Does each account increase or decrease ?

Answer 1

Effect of sale on credit :

Accounts receivable : Increases

Reason:

As it is credit sale. Journal entry is Debit the accounts receivable & credit the sales.

Accounts receivables has debit balance under asset. Thus debiting accounts receivable result in Increase in accounts receivables

Sales revenue : Increases

Reason:

As it is credit sale. Journal entry is Debit the accounts receivable & credit the sales.

Sales revenue has credit balance as Income. (Rule: Credit all incomes & gains) Thus, crediting sales revenue lead to increase in sales revenue

Cost of Goods Sold: Increases

Reason:

Cost of goods sold = Beginning Inventory + Purchases - Ending Inventory

Credit Sales lead to decrease in Inventory as goods moved from factory/company. Therefore, Decrease in inventory leads to Increase in cost of goods sold

Example:

Beginning Inventory is $ 300 , Purchases is $ 200 ,  Ending Inventory is $ 150

Thus, Cost of goods sold = Beginning Inventory + Purchases - Ending Inventory

= $ 300 + $ 200 - $ 150

= $ 350

As resilt of credit sales, Ending inventory get decreases. Suppose credit sales is $ 50, thus ending inventory reduced by $ 50.

Revised COGS,

Cost of goods sold = Beginning Inventory + Purchases - Ending Inventory

= $ 300 + $ 200 -( $ 150 -$ 50 )

= $ 400

as we can see, Increase in Cost of goods sold by $ 50 due to credit sales.

Inventory : Decreases

Reason:

As explained above, Credit sales leads to trasnfer of goods from factory thus lead to decrease in inventory.