Sale definition

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What is a Sale?

A sale is a transaction in which there is a transfer of property or the promise of a service in exchange for some type of remuneration. The completion of a sale is predicated on the following items:

  • Both parties agree to the terms of the transaction

  • It is physically and legally possible to transfer the asset or provide the service

  • Both parties are willing and able to enter into the agreement

A sale can also be considered an event in which goods are being sold at a reduced price. This is commonly done in order to draw down excess inventory or as a loss leader to lure customers into a retail location.

The Characteristics of a Sale

The key characteristics of a sale transaction are as follows:

  • Two parties are involved. The seller offers goods or services, while the buyer receives them.

  • Agreement. There is mutual consent between the buyer and the seller to proceed with the transaction. Terms and conditions, such as price and delivery, are agreed upon.

  • Exchange of value. The buyer provides monetary compensation, or sometimes goods/services in a barter system. The seller provides the agreed-upon goods, services, or assets.

  • Documentation. Receipts, invoices, purchase orders, or contracts serve as proof of the transaction.

  • Legal transfer of ownership. The ownership of goods or services transfers from the seller to the buyer upon payment or delivery.

  • Delivery or fulfillment. The goods or services are delivered to the buyer as per the agreement. This could involve physical delivery, digital transfer, or service execution.

  • Payment. Payment can be immediate, deferred, or through credit arrangements. Methods include cash, card, electronic transfers, or other acceptable payment forms.

  • Risk transfer. The risk of loss or damage typically transfers to the buyer upon delivery, unless otherwise agreed upon in the terms.

These characteristics define the structure and process of a sale transaction, ensuring it is clear, valid, and enforceable.

Example of a Sale

As an example of a sale, a customer contacts a seller and orders ten widgets, for a total of $500. The seller creates a sales order, which is used internally to obtain the widgets, ship them to the customer, and issue an invoice. Once the warehouse uses the sales order to ship the widgets, it notifies the accounting department to issue an invoice to the customer. Once the customer pays the invoice, the accounting department records the cash receipt in the seller’s accounting records, thereby completing the sale.

Accounting for a Sale

There are two ways to account for a sale transaction. If the sale is made for cash, then the entry is a debit to the cash account and a credit to the sale account. If the sale is made on credit, then the entry is a debit to the accounts receivable account and a credit to the sale account. In the latter case, once the customer pays the invoice for the outstanding amount of the sale, the entry is a debit to the cash account and a credit to the accounts receivable account.