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Question

When goods are sold on credit in one month but payment is received in another month, in which month should a company recognize the revenue and expenses? Please create journal entries for both the sale month and the payment month.

Answer

The revenue and expenses should be recognized in January, the sale month. The journal entry for January includes a credit to sales and a debit to accounts receivable. The journal entry for February includes a credit to accounts receivable and a debit to cash.

When goods are sold on credit, revenue should be recognized in the month when the sale is made, not in the month when the payment is received. Therefore, the revenue and expenses should be recognized in January, the sale month. The journal entry for January includes a credit to sales and a debit to accounts receivable. The journal entry for February includes a credit to accounts receivable and a debit to cash. This approach is in accordance with the accrual accounting system, which recognizes revenue when it is earned, rather than when it is received.