Accounting information is usually reported on a monthly, quarterly, and annual basis. Most transactions are recorded based on a period, such as a calendar month. During a standard month, a company engages in business transactions that warrant accounting classification and recording. Listed below are some examples of business transactions and the related journal entries that are created.
Journal Entry #1: Sales Order Processed
The Demo Association sells 4 T-shirts at $25 each on May 1st to the Sacramento Piping Company on account, based on a purchase order received.
Accounts Receivable |
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Sales |
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(Debit) |
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(Credit) |
In this journal entry, the sale of the t-shirts is recorded as a credit to the Product Revenue account, as this sale results in increased revenue for the T-shirt product. However, the purchase was made using a Purchase Order, so the Accounts Receivable account is debited for the amount of the sale.
Journal Entry #2: Cash Receipt Processed
The Demo Association receives a payment from Sacramento Piping on May 15th for the shirts.
Accounts Receivable |
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Cash |
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(Credit) |
(Debit) |
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Once the payment is received, the Accounts Receivable account is credited for the amount, clearing out the debit recorded at the time of the initial sale. The Cash account is debited for the amount of the payment. This is because in the double-entry accounting system (covered in more detail further in this appendix), assets are debited when that account balance is increased.