Journal Entry for Inventory Sold on Credit

Inventory sold on credit is the business transaction the company delivers inventory to customers first and collects cash later.

Inventory refers to the raw materials, components, and finished products that a company has on hand to meet customer demand. Many businesses rely on inventory to keep their operations running smoothly.

A manufacturing company may keep a large inventory of parts and unfinished products in its factory, while a retail store may maintain a stock of finished merchandise on its shelves.

Managing inventory effectively is essential for keeping costs under control and ensuring that customers can always be served. To do this, businesses must carefully track their inventory levels and plan their production schedules accordingly. By maintaining a healthy inventory, businesses can avoid the costly consequences of stockouts and overproduction.

Credit sale is a type of sale in which the buyer pays for the goods or services at a later date. This type of sale is often used when the buyer does not have the full amount of money needed to pay for the purchase upfront. In many cases, the buyer will be given a grace period to pay off the balance before interest starts accruing.

However, it is important to note that credit sales can often result in higher prices due to interest and fees. So, it is important to carefully consider whether this type of sale is the best option for your needs.

Journal Entry for Credit Sale of Inventory

Inventory is the current assets on the company’s balance sheet. When it is sold to the customers, it is no longer under company ownership. So we have to remove it from the balance sheet.

The inventory will be removed when the risk and reward transfer to the customer, and it is recorded in contrast with the cost of goods sold on the income statement.

The journal entry is debiting cost of goods sold and credit inventory.

The entry will reclass the inventory on balance sheet to cost of goods sold on the income statement.

At the same time, the company needs to record the revenue on the income statement. The revenue has be recorded in the same period as the cost of goods sold.

Moreover, it is a credit sale, so the company has to record the accounts receivable as well. It is the balance that the company needs to collect from the customer.

The journal entry is debiting accounts receivable and credit sale revenue.

The accounts receivable will be present on the balance sheet and reversed when cash is collected.

Example

Company ABC has sold the inventory on credit to the customers. The inventory cost is $ 60,000 and it sold for $ 80,000 to the customer. Please prepare journal entry for inventory sold on credit.

The inventory cost $ 60,000 is sold to the customer, it needs to remove from the balance sheet. ABC has to record the cost of goods sold as well.

The journal entry is debiting cost of goods sold $ 60,000 and credit inventory $ 60,000.

The COGS will be increased by $ 60,000 as the inventory reduces for the same amount.

At the same time, ABC has to record accounts receivable and sale revenue.

The journal entry is debiting accounts receivable of $ 80,000 and credit sale revenue of $ 80,000.