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 .

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.

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