Key Concepts
When a business sells goods or services on credit, it delivers the goods (or provides the service) together with an invoice. The double entry depends on whether the business is recording the sale or the later collection of cash:
| Event | Debit | Credit |
|---|---|---|
| Credit sale of goods or services | Trade receivables — [Customer] (+asset) | Sales revenue / Service fee revenue (+income) |
| Collection of cash from a credit customer | Cash at bank / Cash in hand (+asset) | Trade receivables — [Customer] (−asset) |
For a sale of goods, the cost side is also recorded (perpetual method): Dr Cost of sales / Cr Inventory. Two further accounts often appear:
- Sales returns — when a customer returns goods (Dr Sales returns / Cr Trade receivables — [Customer]).
- Discount allowed — a cash discount given to a customer who pays early (Dr Discount allowed / Cr Trade receivables — [Customer]). Discount allowed is an expense.
Recap from Chapter 4 — trade vs cash discount.A trade discount is a reduction off the list price, given to encourage customers to buy in larger quantities — it is never recorded; only the reduced price after deducting the trade discount is entered in the books. A cash discount (discount allowed) is given to encourage early payment — it is recorded, as an expense, at the time the customer pays early.
Dishonoured cheque (recap from Chapter 8).If a customer's cheque is later rejected by the bank, the receipt is reversed: Dr Trade receivables — [Customer] / Cr Cash at bank (dishonoured cheque) — the customer's debt is restored.
The trade receivable increases when you sell, decreases when they pay, return, or take a discount. Selling on credit increases (debits) Trade receivables; everything that settles or reduces the debt (cash received, goods returned, discount allowed) decreases (credits) it.
The following transactions took place in September 20X9:
- 3 Sep — Sold oats to Priya at a list price of $6,000 with a 10% trade discount. The cost of the oats sold was $3,200.
- 6 Sep — Priya returned oats with a list price of $600. The cost of the oats returned was $320.
- 10 Sep — Priya paid the outstanding balance from 1 September 20X9 by cheque.
- 3 Sep sale: $6,000 − 10% trade discount = $5,400.
- 6 Sep return: $600 − 10% trade discount = $540.
- 10 Sep payment: the $1,200 invoice of 28 Aug is paid on 10 Sep — within 15 days — so a 2% cash discount applies: 2% × $1,200 = $24. Priya pays $1,200 − $24 = $1,176 by cheque.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X9 | |||
| 3 Sep | Trade receivables — Priya | 5,400 | |
| Sales revenue | 5,400 | ||
| Cost of sales | 3,200 | ||
| Inventory | 3,200 | ||
| 6 Sep | Sales returns | 540 | |
| Trade receivables — Priya | 540 | ||
| Inventory | 320 | ||
| Cost of sales | 320 | ||
| 10 Sep | Cash at bank | 1,176 | |
| Trade receivables — Priya | 1,176 | ||
| Discount allowed | 24 | ||
| Trade receivables — Priya | 24 |
Both profit for the period and trade receivables decrease by $24 — the discount is an expense (lowering profit) and it settles part of the debt (lowering trade receivables).
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X9 | ||||
| 1 Sep | Balance b/d | 1,200 Dr | ||
| 3 Sep | Sales revenue | 5,400 | 6,600 Dr | |
| 6 Sep | Sales returns | 540 | 6,060 Dr | |
| 10 Sep | Cash at bank | 1,176 | 4,884 Dr | |
| 10 Sep | Discount allowed | 24 | 4,860 Dr | |
| 1 Oct | Balance b/d | 4,860 Dr |
Statement of Financial Performance for the month ended 30 September 20X9 (extract)
| $ | |
|---|---|
| Less: Other expenses | |
| Discount allowed | 24 |
- 12 Mar — Provided repair services and issued an invoice of $450 to Faizal.
- 10 Apr — Faizal paid by cheque, $450.
- 14 Apr — The bank informed Bytes & Brains IT Services that Faizal's cheque was dishonoured.
| Date | Particulars | Dr ($) | Cr ($) |
|---|---|---|---|
| 20X5 | |||
| 12 Mar | Trade receivables — Faizal | 450 | |
| Service fee revenue | 450 | ||
| 10 Apr | Cash at bank | 450 | |
| Trade receivables — Faizal | 450 | ||
| 14 Apr | Trade receivables — Faizal | 450 | |
| Cash at bank (dishonoured cheque) | 450 |
(The 14 Apr entry reverses the 10 Apr receipt — Faizal's debt is restored because the bank did not honour his cheque. No cash discount was given, so none is withdrawn.)
Recording only one entry for a credit sale of goods. A credit sale of goods needs two entries — one for revenue (Dr Trade receivables / Cr Sales revenue) and one for cost (Dr Cost of sales / Cr Inventory).
Applying the cash discount to the wrong amount. The 2% discount is calculated on the invoice being paid ($1,200), not on the new sales made during the month.
Debiting Sales revenue when a cheque is dishonoured. The customer's debt is restored, so the debit goes to Trade receivables, not Sales revenue.