In a sale on target, there are several steps to complete the entire process and different types of accounting.
Effort-based sale on target
With this method, the sale is treated directly as income and booked as such.
- First, you need to be clear about which items on your balance sheet are being addressed. In the case of a sale to target using the expense method, these are usually the items “Receivables” and “Revenues”.
- As you sell goods, your sales revenue increases. Because the Sales Revenue account is an income account, it increases in credit.
- Due to the fact that you are selling on target, your receivables will increase as payment is still pending. As an active account, your claims increase in debit.
- So your first posting record is “Receivables from Sales”.
- For example, if you sold $500 worth of goods, the posting record would be: Receivables $500 to Sales $500. This is the first step.
Inventory-oriented sales on target
If you use this method, you do not have to record the revenue from the sale, but only the change in inventory due to the disposal of the goods sold.
- Now that you are using the stock-based method, you must first check which items are being addressed. The item “Receivables” remains affected. The second item is “finished goods”.
- Selling goods will decrease your supply. Thus, the “finished goods” asset account decreases in credit. The demands increase as usual in the target.
- So the posting record is “Finished Goods Receivable”.
- Applied to this case, the previous example would read: “Receivables $500 on finished goods $500”. This completes the first step in the inventory-oriented method.
Completion by payment
Since you will not receive your money for your sold goods until later, this process must be recorded separately.
- Because the outstanding payment is now being made, your claims are reduced. Since Receivables is an asset account, it decreases in credit.
- You will now receive the expected money. This addresses the “Bank” or “Cash” asset account, depending on whether it is a transfer or cash payment. An active account increases in debit.
- The posting record is therefore “Bank to accounts receivable”.
- Based on the tried and tested example, the posting record is as follows: Bank €500 to receivables €500.
This posting record applies to both the inventory-based method and the expense-based method.
Consideration of sales tax
If you have to take sales tax into account when making your booking, your first booking record will change. The final booking record when paying remains the same except for a change in the numbers.
- As an example: “The sale of goods on target worth €500 excluding 19% sales tax is carried out using the expense-based method”. The term “exclusive” tells you that you have to add 19% to the €500. This works as follows: 500 * 1.19 = 595. The final amount with sales tax is €595. If, on the other hand, the sales tax is shown with the term “inclusive”, this means that the sales tax is already included in the current price.
- The sales tax alone is therefore €95, because €595 – €500 = €95. You can now set up your booking record. The sales tax account is a passive account, which increases in credit.
- Now that VAT has been added, your claims will also increase. Your new value for receivables is now €595. Your posting record would look like this: Receivables €595 to sales revenue €500 + sales tax €95.
- The final posting record upon payment would be: Bank $595 to Receivables $595.
Before you book, you should always make sure which method to use to book. Next, it is important to identify whether VAT is included. Only then can you set up an error-free posting record.
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