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.

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.