Sales are credited in an organization’s accounting records, since this increases the equity of the investors. The offsetting side of the journal entry is a debit - usually to either the cash or accounts receivable account. In essence, the debit increases one of the asset accounts, while the credit increases shareholders’ equity. These offsetting entries are explained by the accounting equation, where assets must equal liabilities plus equity. A sample journal entry that shows the credit entry for a $100 sale for which an invoice was issued appears in the following exhibit.

The sales account accumulates the detail for all sales transactions over the course of a company’s fiscal year, after which the account balance is flushed out with closing entries and transferred in aggregate into the retained earnings account (which is an equity account).

Accounting for a Sales Reversal or Reduction

There are cases in which a sale is reversed (perhaps due to a product return) or reduced (perhaps due to the application of a volume discount). When this happens, the sales account is debited, which reduces its balance. A follow-on effect of this entry is that the profits reported by the organization will decline.