Credit and cash sales In the

Cash or credit?

In the latest in her regular series, AAT expert Teresa Clarke looks at credit sales and cash sales

Credit sales

Credit sales are sales made today and paid for later.

Example: A builders’ merchant sells bricks to a bricklayer on 1 March 2021 for £500, requesting that payment is made within 30 days of the sale. The builder buys the bricks on 1 March 2021 and pays for them on 31 March 2021.

The entry for this type of sale is: Dr Sales Ledger Control Account (trade receivables) £500 Cr Sales £500

The sales ledger control account is another name for the trade receivables account. This is the money owed to the business by its customers. Money owed to the business is an asset and assets are debits. We debit the SLCA because we are increasing the asset.

A separate entry into the individual subsidiary ledger for the customer is made and this mirrors the entry into the SLCA. Dr Mr Bricklayer £500

Remember: The subsidiary ledger is not part of the double entry system.

We credit the sales because these are a form of income and income is a credit.

When payment is received from the customer this will reduce the amount owed to the business and the money is paid into the bank. Dr Bank

£500 Cr SLCA £500

A separate entry into the individual subsidiary ledger for the customer is made and this mirrors the entry into the SLCA. Cr Mr Bricklayer £500

We debit the bank because bank is an asset, and we are increasing the asset. We credit the SLCA because we are reducing the amount owed to us by customers.

Cash sales

Cash sales are sales made today and paid for straight away. Cash sales can include payments received with cash, by bank transfer, debit card, credit card or cheque.

Example: A builders’ merchant sells bricks to a bricklayer on 1 March 2021 for £500 and the builder pays immediately using his business debit card. Dr Bank £500 Cr Sales £500

Note: When a cash sale is made there is no entry into the SLCA. The bank is debited because we are increasing the asset. The sales are credited because we are increasing the sales income.

Credit purchases and cash purchases

Credit purchases are purchases made by the business and paid for later.

Example: A sweet shop buys 50 jars of sweets from a wholesaler on 1 April 2021 for £250 and agrees to pay for the sweets within 30 days of the purchase. The sweet shop takes the sweets on 1 April 2021 and pays for them on 30 April 2021. Dr Purchases £250 Cr Purchases ledger control account (trade payables) £250

The purchase ledger control account is another name for the trade payables. This is the amount of money owed by to the business to suppliers. Money owed by the business is a liability and liabilities are credits. We credit the PLCA because we are increasing the liability.

A separate entry into the individual subsidiary ledger for the supplier is made and this mirrors the entry into the PLCA. Cr Wholesaler £250

Remember: The subsidiary ledger is not part of the double entry system.

We debit the purchases because these are a form of expense and expenses are debits.

When payment is made to the supplier this reduces the amount the business owes to the supplier, so we debit the PLCA and credit the bank. Dr PLCA £250 Cr Bank £250

A separate entry into the individual subsidiary ledger for the supplier is made and this mirrors of the entry into the PLCA. Dr Wholesaler £250

We credit the bank because we are reducing the asset. We debit the PLCA because we are reducing what the business owes to suppliers.

Cash purchases are purchases made by the business and paid for straight away with cash, by bank transfer, debit card, credit card or cheque.

Example: A sweetshop buys 50 jars of sweets for £250 from the wholesaler on 1 April 2021 and pays for them immediately by credit card. Dr Purchases £250 Cr Bank £250

Note: When a cash purchase is made there is no entry into the PLCA. The bank is credited because we are reducing the asset. The purchases are debited because the purchases are increasing.

• Teresa Clarke FMAAT

If you wish to further your knowledge, you might like this workbook which is one of my series of workbooks devised to support your studies

A Beginners Guide to Bookkeeping and Accounting is available on Amazon for £3.49 in paperback or £1.89 as an eBook. Go to https:// tinyurl.com/mt5rrw4a

ONE WEBSITE TO RULE THEM ALL!

Check our new funky PQ magazine website Go to pqmagazine.com – where nothing is fake, and all the news is real!