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Basic Accounting

Journalizing and Taking Care of Customer Invoices



Journalizing and taking care of invoices can be serious problem for starters. It’s not because of it is complicated—not at all, but it is because of the customer is important, can be serious problem if they got billed twice for the same sales, for example. The customer maybe upset and never comeback for any other purchase. It also becomes a big problem when an invoice is recorded in the wrong amount or goes to the wrong account—the transaction isn’t tracked leaving the company with no payment.

If this is your first time for the task, I would like to tell you that it is not that hard, not even as hard as solving intermediate accounting exam. You may think that it is real transactions in a real business—so if you make mistake, you not only losing exam, but losing company’s money. And you don’t want that to happened, do you?


Some true some false. Yes it is a real transaction in real business and the risk of losing company is true, especially if you make mistake and you don’t realize it. Getting a solid advice on how to handle the task correctly, is the best approach, and reading this material is a good start. Here are some simple guidelines on how to journalizing and taking care of invoice, either it is with or without sales tax, involves or does not involves inventory. Read on…

An invoice is a document showing the details of goods and services purchased by the customer and it includes a reference number (the invoice number), the goods and services sold, quantities, prices, taxes, total amount due, the transaction date, and the terms of sale.

In most cases, invoices are sent to customers after the goods have been shipped to the customer, or the services have been rendered. This differs from a cash on delivery sale, in which payment is handed over at the same time goods are sold.

When you create an invoice, a journal of the transaction must be created (it’s a Sales Journal), so the postings can be transferred to the general ledger. The transaction is posted to all the affected accounts. If you’re using accounting software, this is automatic, and many software users don’t understand how the journal assigns the transaction to accounts.


Journalizing Invoice Does Not Involve Sales Tax Nor Inventory

The following examples are presented to clarify the way invoices are journalized as they feed the general ledger. The journal for a simple sales transaction, involving no inventory or sales tax, is seen below:

[Debit]. Accounts Receivable = $100

[Credit]. Sales = $100

If you post certain types of sales to different sales accounts as you create the individual items covered by the invoice, the journal for the invoice tracks those sales accounts, as seen below:

[Debit]. Accounts Receivable = $100

[Credit]. Sales – Services = $60

[Credit]. Sales – Product = $40


If you’re using a divisionalized chart of accounts, the posting accounts would differ by division. You’d post sales to the division that produced the sales and track it by division. For example:

[Debit]. Accounts Receivable = $100

[Credit]. Sales – Div#1 = $60

[Credit]. Sales – Div#2 = $40


Journalizing Invoice Involves Sales Tax

When sales tax is involved, it doesn’t affect sales accounts in the journal (sales tax is neither revenue nor an expense to the seller). However, the tax affects the total amount due from the customer, which in turn affects the total of Accounts Receivable.

The journal displayed below is based on the fact that services are not taxable, and the products sold are taxable at the rate of 7%.:

[Debit]. Accounts Receivable = $102.80

[Credit]. Sales – Services = $60[Credit]. Sales – Products = $40

[Credit]. Accounts Payable – Sales Tax = $2.80


Journalizing Invoice Involves Sales Tax and Inventory

Things get a bit more complicated when the sales involves inventory, because the journal posts the cost of goods sold (COGS) which is a cost account, and decreases the value of company’s inventory in the asset account. So it needs 2 sets of journals:

As you can see below, those parts of the overall postings don’t affect the amount of the invoice or the sales tax:

[Debit]. Accounts Receivable = $42.80

[Credit]. Sales – Products = $40

[Credit]. Accounts Payable – Sales Tax = 2.80


[Debit]. Cost of Goods Sold = $18

[Credit]. Inventory = $18

Note: Inventory postings are equal and opposite and don’t affect the total amount of the invoice. If you’re not using accounting software, you must also reduce the quantity of inventory in your inventory record (accounting software does this automatically).


Customer Invoice Payment Journals (Cash Receipt Journal)

When a customer sends payment for an invoice, you record that payment. The journal for the payment (called ‘Cash Receipts Journal’) posts the transaction appropriately. Below figure displays the journal for a customer payment:

[Debit].  Bank = $42.80

[Credit]. Accounts Receivable = $42.80

It’s important to understand that an invoice payment journal has no references to the accounts that are tracking income, inventory, or sales tax. All of that information was posted when the original invoice was created.

The payment of the invoice is a second and separate transaction. Many accountants receive questions from clients who want to know why the payment doesn’t show what products were sold or what general ledger income accounts were affected. In addition to this journal, which controls the postings to the general ledger, you need to track the customer’s activity in the customer’s record. You must know the current amount of receivables from each customer. All accounting software does this automatically.

The cash receipts journal does not send anything to the general ledger except the amount of money received. If the original invoice had been $142.80 and $42.80 is paid, the customer’s open balance is $100 (plus any other unpaid invoices). All of that detailed information is kept in the customer’s record.


How if It is A Cash Basis Sales?

A cash sale is a transaction in which the customer’s money is received at the time the goods or services are received. Don’t take the word “cash” literally; the payment may involve cash, a credit card, a debit card, or a gift certificate.
Many companies that do most or all of their business as cash sales don’t bother tracking customers for these sales. Some create a single customer (often named “Cash Customers”) in their accounting software.

Most accounting software provides a discrete transaction form for cash sales (the name of the form or menu command differs among software programs), and the journal produced by a cash sale (the Cash Receipts Journal) looks similar to:

[Debit]. Bank Account = $107

[Credit]. Sales = $100

[Credit]. Accounts Payable – Sales Tax = $7


Taking Care Daily Journals from Batched Transactions (Cash Register)

Businesses that use a cash register don’t record each individual transaction in their books; instead they enter all the daily sales as a batch. Don’t forget to create separate entries for taxable items and nontaxable items, and post each line to the appropriate income account (the taxable income account and the nontaxable income account).

Some accounting software (such as SAGE MAS 200, QuickBooks, Peachtree, MYOB) links the sales tax status to an item, and the item is linked to a sales account. It’s common to link both taxable and nontaxable items to the same sales account. The sales tax liability report is generated based on the item information in the sales transaction form, not on the account to which the sale is posted.

Also enter the cash received that you’re taking to the bank, which should result in a zero-based transaction. Of course, it rarely works this well, because when you’re ready to take the day’s cash receipts to the bank, after you remove the money you want to remain in the till the total in the cash bag doesn’t match the total sales (your batch transaction doesn’t zero out).

The solution is to track overages or shortages so that the sales match the bank deposit. To track over and short, it’s best to create an account named Over/Short of the type Other Income/Expense. Using an income or cost of sales account distorts the gross profit and could effect commission calculations.

Note: If you’re using software that insists on items in the transaction form (such as MAS 200, QuickBooks, MYOB, Peachtree), create over and short items and link them to the over/short account.

Enter the over/short amount in the transaction form, using a minus sign for a shortage. (In the transaction journal, an overage posts a credit and a shortage posts a debit.). The transaction journal posts the over/short amount properly, as seen below:

[Debit]. Operating Account = $3,189.54

[Credit]. Nontaxable Sales = $1,050.50

[Credit]. Taxable Sales = $2,005.50

[Credit]. Sales Tax Payable = $143.54

[Credit]. Over & Short = $10

Regardless of the total sales, the amount posted to the bank has to match the amount you take to the bank. To make this happen you have to track overages and shortages Over time, the over/short account usually balances; it’s short one day and over another day. However, if you’re short every day and the shortages are growing, you have an entirely different problem. You need to look at the person who stands in front of the cash register.

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