Credit sales and the Debtors Journal

Selling now, collecting later

A credit sale is a sale where the goods leave today and the money arrives later. The customer takes the goods and the business takes a promise. That promise is worth real money, so the business records it as an asset: a debtor.

The sale itself is as real as a cash sale. Ndlovu Electrical Supplies in Pietermaritzburg is R3 600 better off whether M. Pillay pays today or at the end of the month. What differs is which asset the business is holding. A cash sale puts money in the bank. A credit sale puts a claim against a named person on the books.

Two effects happen at once

The business keeps a running record of its stock, so every sale is recorded twice over: once for the money side and once for the goods side.

The money side. The business gains a claim, so Debtors control goes up. The business earned something, so Sales goes up.

The goods side. Goods physically left the shelf. Trading stock goes down by what those goods cost, and that cost becomes an expense called Cost of sales.

Selling price and cost price are two different numbers doing two different jobs. The selling price is what the customer owes. The cost price is what the business gave up. The gap between them is the gross profit.

Worked example. On 4 March, Ndlovu Electrical Supplies sells cable to M. Pillay on credit for R3 600. That cable had cost the business R2 400.

Start with the effects, not the labels.

1. The business is owed R3 600 that it was not owed yesterday. An asset increased, so Debtors control is debited R3 600. The business earned R3 600, so Sales is credited R3 600.
2. Cable that cost R2 400 left the storeroom. An asset decreased, so Trading stock is credited R2 400. That cost has been used up in earning the sale, so Cost of sales is debited R2 400.

Debits: R3 600 + R2 400 = R6 000. Credits: R3 600 + R2 400 = R6 000. The entry balances, and the sale earned R1 200 gross profit.

Invoices like this one are not written up one at a time in the General Journal. They are listed in the Debtors Journal (DJ), which has a Sales column and a Cost of sales column. At month end only the column totals are posted to the general ledger, which saves a great deal of writing and a great deal of error.

Core checkpoint: Before writing a single debit or credit, say in plain words what the business gained and what it gave up. For a credit sale it gained a claim and income, and it gave up goods at cost. Get those four things straight and the entry writes itself. Note also what does not happen: a credit sale never touches the Bank account, because no money moved.