How to Accounts Sales Revenue in Profit & Loss (Income Statement)

 How to Accounts Sales Revenue in Profit & Loss (Income Statement)

Income statement is the key statement to the financial statement. From Income Statement (P/L), all the quantitative analysis regarding the income and expenses can be made for the particular fiscal year.

What is Sales Income???

Sales Income otherwise Revenue in the Profit & Loss statement (Income Statement) is the first item within the statement itself. If you have known about the debit and credit, which is the backbone of any accounting/bookkeeping transaction, Sales is the item which goes in the credit column as income is always a credit item in the accounting transactions.

Sales constitutes the total sales that the company has generated for the particular year i.e. the total amount ( credit or cash) that has been made during the fiscal year by selling the items that the organization primarily deals with. There could be multiple sales items in the Income Statement which refers that company is dealing with more than one item to generate its sales revenue.

To fully understand the Sales/Revenue term you should understand what sales return and discount on sales is:

Sales Return & Discount on Sales

Sales Return is the total return amount that has been returned to the company by the buyer. This can be because of several reasons and depends on the agreement with the buyer. In certain business, there is no return policy in those businesses you cannot see a Sales Return item in the financial statement. But there are plenty of businesses, because of the competition in the business, offering return facility to the buyer in case of faulty goods/obsolete goods or there might be several other reasons to do so. In this case company calculates the Sales Return amount mostly to the same rate as when it was originally sold to the buyer.

, What Discount on Sales is and how it is accounted?  Many of the organization offer discount facility on sales it might be because of several issues like, Company wants to sell the obsolete products by offering discount on sales, to achieve the economies of scale (means selling quantities on high amount with minimal profit for each item can actually make high sales revenue, hence high profit). These are just some of the examples to understand why company offers discount on sales, there could be many of these issues specifically applicable to different industries.

Now, let’s join to the party, Time to understand the accounting transactions for these items. Let’s understand this by means of the examples:

·         Company A has sold 4000 units of products to Company B for $400,000 in credit.

Journal Entries to show sales by Company A:  

Dr. Company B (as a Debtor)  $400,000 

                     Cr. Sales Revenue                        $400,000.

·         For small entities, like retail industry, they regularly do cash sales, for that the entry should be:                

Dr. Cash/Bank                    $400.                

  Cr. Sales Revenue                   $400.

·         Now Let’s do the example of Sales with discount and sales return issue, Let’s say Company A sells a 4000 units of product worth $400,000 thousand to Company B for Credit, in which it offers discount of $20 per unit. Company B returned some of the goods worth $1000 because of the faulty issue. Then to record the transaction, what should you do????  Guess??? Try to form your own answer before checking below listed entry: 

First of all to book the sales, JV needs to be entered as: 

Dr. Company B                  $320,000        

      Dr. Discount on Sales     $80,000           

 Cr. Sales Revenue      $400,000

There are some alternate presentation you can make, either you can book full sales revenue which is the gross sales revenue of you can net off the discount and sales revenue to get to the overall Credit balance to $320,000. It actually depends upon how you are presenting and the country specific regulatory requirements.

Again, Sales Return needs to be adjusted afterwards, which requires you to perform the calculation as:

Dr. Sales Return $1,000

Cr. Company B $1,000.

Which will adjust the receivable amount from Company B by the sales return amount and debited sales return figure will be netted off against the Sales Revenue which further decreases the overall sales figure by $1,000.

This is all with the basics regarding the Sales Revenue, which is a main part of the Income Statement. On How To Accounts We will discuss the another important item of the Income Statement i.e. COGS (Cost of Goods Sold) in the next article. Till then Cheers!