Journal Entries for Revenue

A journal entry must be made each time a business makes a sale. This journal may be called a revenue, sales or income journal and the purpose of it is to show any sales made by a business in its profit and loss account (also known as the income statement).

As explained in our guide to double entry bookkeeping, when a revenue account increases we must show this by adding a credit entry to the account. This credit forms one side of our revenue journal entry.

The opposite side of the journal can vary depending on how the goods/services will be paid for. The customer may choose to pay in cash or they may buy the goods on credit and the entry that we make for the sale must reflect this, otherwise the balance sheet side of the revenue journal will be incorrect.

The two different entries will be explained below:

Journal Entry for Cash Sales

The journal entry for a cash sale is quite simple. The cash account is an asset account and therefore when it increases we debit the account.

For our examples we will imagine the goods being sold were sold for £100

Therefore, if the customer paid in cash, the journal entry would be as follows:

• Dr Cash £100
• Cr Revenue £100

This journal shows that the cash account increased by £100 and this is due to goods being sold for £100.

Journal Entry for Credit Sales

The entry required for a sale made to a customer on credit is slightly more complex but still very easy to get your head around.

When goods are sold on credit, the cash will be paid over by the customer at a later date and therefore we can not debit the cash account at the same time as crediting the revenue account. Instead, the debit side goes to a different asset account known as the “trade receivables” account. This is an asset because we assume that the customer will, at some point, pay the money back to us.

Therefore the double entry for a credit sale is as follows:

• Dr Trade Receivables £100
• Cr Revenue £100

This journal shows that the trade receivables account increased by £100 and this is due to goods being sold for £100.

At What Point Should the Journal Entry be Made?

As we have discussed in a recent post surrounding revenue recognition, a sale can only be recognized when the goods/services have been delivered to the customer.

The point at which cash is received is not relevant to the revenue recognition point and this is why we looked at the two different examples above where even though the cash may not have been received, the revenue was still recognized.

There are a few other circumstances which may complicate the journal entries required to recognize revenue.

For example, what happens if a customer pays for their goods in advance of receiving them?

Or imagine if we agree to provide a service to a customer once a month for a year, receiving one payment at the end of the year for all 12 months. Each month, revenue should be recognized but nothing is yet receivable from the customer.

In these situations, the use of deferred/accrued income accounts is needed and we will look further into these future guides.