The journal entry to record the sale of finished goods includes which two of the following?

What is the Sales Journal Entry?

A sales journal entry records the revenue generated by the sale of goods or services. This journal entry needs to record three events, which are the recordation of a sale, the recordation of a reduction in the inventory that has been sold to the customer, and the recordation of a sales tax liability. The content of the entry differs, depending on whether the customer paid with cash or was extended credit. In the case of a cash sale, the entry is:

• [debit] Cash. Cash is increased, since the customer pays in cash at the point of sale.

• [debit] Cost of goods sold. An expense is incurred for the cost of goods sold, since goods or services have been transferred to the customer.

• [credit] Revenue. The revenue account is increased to record the sale.

• [credit]. Inventory. The inventory asset account is reduced to reflect the reduction of inventory caused by the sale, when goods are transferred to the customer.

• [credit] Sales tax liability. If a sales tax liability is created by the sale transaction, it is recorded at this time, and will later be eliminated when the sales tax is remitted to the government.

If a customer was instead extended credit (to be paid later), the entry changes to the following:

• [debit] Accounts receivable. A receivable is created that will later be collected from the customer. This replaces the increase in cash noted in the preceding journal entry.

• [debit] Cost of goods sold. Same explanation as noted above.

• [credit] Revenue. Same explanation as noted above.

• [credit] Inventory. Same explanation as noted above.

• [credit] Sales tax liability. Same explanation as noted above.

Example of the Sales Journal Entry

For example, a company completes a sale on credit for $1,000, with an associated 5% sales tax. The goods sold have a cost of $650. The sales journal entry is:

• [debit] Accounts receivable for $1,050

• [debit] Cost of goods sold for $650

• [credit] Revenue for $1,000

• [credit] Inventory for $650

• [credit] Sales tax liability for $50

Terms Similar to Sales Journal Entry

A sales journal entry is the same as a revenue journal entry.

Record Indirect Production Costs in Overhead

There are other types of production-related expenses that are allocated to inventory, such as rent, utilities, and supplies for the manufacturing operation. These expenditures typically begin as accounts payable and are allocated to an overhead cost pool, from which they are then allocated to inventory and the cost of goods sold. The allocation to a cost pool may occur later, but we will assume it occurs at the time of initial accounts payable recordation, with this entry:

Record Production Labor in Overhead

Various types of production labor, such as production management salaries and materials management wages, are also routed through an overhead cost pool, from which they are later allocated to inventory. The entry for this is usually a shifting of the wages expense into a cost pool, with this entry:

Move Raw Materials to Work in Process

If you are operating a production facility, then the warehouse staff will pick raw materials from stock and shift it to the production floor, possibly by job number. This calls for another journal entry to officially shift the goods into the work-in-process account, which is shown below. If the production process is short, it may be easier to shift the cost of raw materials straight into the finished goods account, rather than the work-in-process account.

Record Inventory Scrap and Spoilage

There will inevitably be a certain amount of scrap and spoilage arising from a production process, which is normally recorded in the overhead cost pool and then allocated to inventory. If these amounts are abnormal, then you would instead charge the abnormal amount to the cost of goods sold (so that they are not carried as an asset).  The entry for the former situation is:

Record Finished Goods

Once the production facility has converted the work-in-process into completed goods, you then shift the cost of these materials into the finished goods account with the following entry:

Allocate Overhead

At the end of each reporting period, allocate the full amount of costs in the overhead cost pool to work-in-process inventory, finished goods inventory, and the cost of goods sold, usually based on their relative proportions of cost or some other readily supportable measurement. The journal entry is:

Sale Transaction Entry

Once there is a sale of goods from finished goods, charge the cost of the finished goods sold to the cost of goods sold expense account, thereby transferring the cost of the inventory from the balance sheet (where it was an asset) to the income statement (where it is an expense). The entry is:

There is also a separate entry for the sale transaction, in which you record a sale and an offsetting increase in accounts receivable or cash. A sale transaction should be recognized in the same reporting period as the related cost of goods sold transaction, so that the full extent of a sale transaction is recognized at once.

That concludes the journal entries for the basic transfer of inventory into the manufacturing process and out to the customer as a sale. There are also two special situations that arise periodically, which are adjustments for obsolete inventory and for the lower of cost or market rule.

Obsolete Inventory Entry

There is likely to be some amount of obsolete inventory arising on an ongoing basis, so it is best to continually charge a small amount to the cost of goods sold and set up a reserve account for obsolete inventory, using the following entry:

Then, when you locate obsolete inventory and designate it as such, you credit the relevant inventory account and debit the obsolescence reserve account. This approach charges the cost of obsolescence to expense in small increments over a long period of time, rather than in large amounts only when obsolete inventory is discovered.

Lower of Cost or Market Entry

You have to periodically test inventory to see if the market cost of any inventory item is lower than its cost under the lower of cost or market rule. As a result, you may need to reduce the carrying amount of the inventory item to its market value, and charge the loss on inventory valuation expense for the decrease in recorded cost of the inventory. The associated entry is:

 
An interesting point about inventory journal entries is that they are rarely intended to be reversing entries (that is, which automatically reverse themselves in the next accounting period). Instead, the entries are usually one-time events.

Additional entries may be needed besides the ones noted here, depending upon the nature of a company's production system and the goods being produced and sold.