How to record a sale

The timing depends on your accounting method. business.gov.au gives the example of a builder who invoices for a finished project: under accrual accounting the builder records the sale straight away, even though the customer hasn't paid. Under cash accounting the sale waits until the payment is received, and business.gov.au gives the example of an invoice sent on a Tuesday and paid on a Thursday being recorded under Thursday's date.

When the customer pays at the time of sale, as in most shops, the two methods give the same date. The difference shows with sales on credit.

business.gov.au describes an invoice as a request for payment that tells the customer what they owe, by when and how to pay, and a receipt as a record of what the customer paid for. Where the customer pays at the counter or at an online checkout, one document usually does both jobs.

For a regular invoice, business.gov.au sets out what is commonly included: a unique invoice number, the issue date, what was sold with its quantity and price, and the buyer's name, among other details. Use the invoice number as the reference for the entry. It ties the books to the document, and a skipped or doubled number is easy to notice.

• Sale on credit, accrual accounting: when the invoice is issued, debit accounts receivable and credit the sales account. When the customer pays, debit the bank and credit accounts receivable.
• Sale paid on the spot: debit the bank, cash on hand for notes and coins, or a card takings clearing account where card money reaches the bank later, and credit the sales account.
• Sale on credit, cash accounting: nothing goes into the books until the payment arrives, then debit the bank and credit sales. Keep a separate list of unpaid invoices, because the books won't show what customers owe.

If you sell different kinds of things, such as labour and materials, credit each to its own sales account so your profit and loss statement shows where income comes from.

A tradesperson using accrual accounting invoices a job with labour and materials. The customer pays part, returns some unused materials, then pays the rest.

Sales end up at the invoice amount less the credit note, recorded when the work was invoiced and corrected when the materials came back. The two payments only cleared what the customer owed, and accounts receivable finishes at nil for this invoice.

Selling goods from stock adds a second question: what did the goods cost? With perpetual stock tracking, the usual practice is a further entry at the time of sale, a debit to cost of goods sold and a credit to inventory at the items' cost. With periodic tracking the cost is worked out from stock counts instead. Either way, the entries for the sale itself are the ones above.

• Returns and price corrections: issue a credit note that refers to the original invoice. The usual entry is a debit to the sales account, or a sales returns account, and a credit to accounts receivable.
• Refunds: if the customer had already paid, paying the money back clears the credit left on their account, with a debit to accounts receivable and a credit to the bank.
• Discounts at the time of sale: business.gov.au's glossary describes a discount as money taken off the full price of a good or service. A discount shown on the invoice usually means the sale is recorded at the price charged.
• Discounts for paying early: business.gov.au mentions these as one way to encourage prompt payment. How one is recorded when the customer takes it is a question for your accountant.

Not every deposit is income from sales. Before coding money that comes in, check what it is:

• a customer paying an invoice already recorded under accrual accounting, which clears accounts receivable
• loan funds, which are a liability to the lender
• money the owner puts in, which goes to an owner's account; which one suits your business structure is a question for your accountant
• a refund from a supplier, which reverses the original cost
• a transfer from another of the business's own accounts
• money from selling equipment the business used, which isn't trading income. How the sale of an asset is recorded is a question for your accountant.

Keep a copy of every invoice, credit note and receipt you issue. Under business.gov.au's invoicing guidance, most business records must be kept for at least 5 years, and printed or electronic copies both count.