Selling on Account
When you extend credit to your customers, there will be a lag between the time of the sale and the time you get paid. Credit sales by nature allow customers to buy now and pay later. That can help you increase your sales, particularly with commercial customers. Although it would be nice if everyone paid you in full and on time, there will be some customers who pay late or never. As you'll learn in Chapter 11, there are some simple steps you can take that will help minimize this potential problem.
If you decide to extend credit, it's up to you to know who owes you how much at any given time and to communicate that information to your customers. After all, no matter how honest and trustworthy your customers are, they can't pay if they don't know how much they owe you. To keep track of individual customers' accounts, use an accounts receivable subledger (or customer ledger). This ledger is simply a book that holds a separate page for each customer account; on those pages, you record all the activity that relates to each particular customer. The sum of all your individual customer balances must equal the balance in the accounts receivable account in the general ledger (a.k.a. the accounts receivable control account).
The Mechanics of a Credit Sale
When you make a sale on account, no cash will change hands at the time of the sale. Instead, you'll present the customer with an invoice detailing the transaction, and he will offer you the implicit promise to make payment on some later, agreed-upon date. The basic journal entry, which will be recorded in your sales journal, is fairly simple: a debit to accounts receivable and a credit to sales. Unlike cash sales, you cannot record credit sales in one big lump; they must be recorded individually so you can properly account for each customer's purchases.
In the description column of your sales journal, you'll write the customer name and account number. If the customer has issued a purchase order for this transaction, you can record that information in your description column as well. Make sure to also record your invoice number for easy reference later on.
Posting to the Ledgers
Accounts receivable transactions require posting to two different ledgers. Complete individual sales data for the transaction has to be posted to the appropriate customer accounts in the customer ledger. Then summary information (column totals from each completed journal page) is posted to the accounts receivable and sales general ledger accounts, as well as any other accounts included in the transactions.
A customer statement is a document containing summary information for that customer's account. It includes a list of all transactions for the period, such as new invoices and payments received. The statement ends with a balance due, which is the total amount you expect to receive from that customer.
Posting to the general ledger accounts requires very minimal information: the date, the dollar amount, and the sales journal page (typically numbered SJ1, SJ2, and so on). Posting to the customer ledger, though, requires a more comprehensive transfer of information. After all, that is where you'll get the data you need to bill your customers. There you'll include the date, transaction amount, and sales journal page, as well as the invoice number and the customer's purchase order number (when applicable). Any information you would like to include on the customer's monthly statement should be included on his ledger page.
Credit Sales, Cash Accounting Method
There are many companies that use the cash method and extend credit to their customers (very common among small service companies). This is where recordkeeping and revenue-tracking purposes go their separate ways. Under this circumstance, you still want to record the accounts receivable transaction; otherwise, you'll have no way of remembering who owes how much to your company. You can't really record the sale, though, because no cash has changed hands yet.
Don't let this detail throw you. You can still record everything the same way it's explained in this chapter with one small exception: unpaid sales will go into a pending sales account rather than your regular sales account.
The pending sales account will appear in your sales journal, and that's the account you'll post your credit sales to when you make them. When cash comes in, you'll have to make a double entry: the first part records the debit to cash and the credit to accounts receivable, and the second part records the transfer from pending sales to actual sales.