Companies sell products or services that help generated revenues. For the former category, some companies purchase items to sell them after adding a margin. Some others also manufacture those products. Either way, these companies hold products that they can sell later. These products are known as inventory for the company in business terms.
Usually, companies record sales in a revenue account. It holds a record of all items sold by a company. Some companies may also use a dedicated account for their inventory sales.
What is Inventory Sale?
Inventory sale refers to goods sold by a company through its selling process. It includes any items a company provides its customers in exchange for compensation. However, inventory sales may also refer to the accounts companies use to record these sales. This account holds the sale proceeds received from finished goods a company sells during its usual course of business.
Sometimes, inventory sale may also refer to when a company sells its extra stock of products or goods to customers at a discounted price. Companies do so to dispose of stock they have held for a long time. This process is often prevalent in industries where finished goods have a limited period. For example, bakeries may offer their products at a cheaper rate when closing at the end of the day.
What is the accounting for Inventory Sales?
The accounting for inventory sales includes two sides. The first includes recording the sale for the sale proceeds received from the customer. In this case, the company selling the goods must recognize the revenue or income in exchange for compensation. In some cases, this compensation may come later, which will also require recording a receivable.
The other side of this transaction involves recording a decrease in the goods the company has sold. It requires crediting the inventory account where the company has sold the finished goods. On the other hand, it also entails recognizing the cost of these goods as sold in the income statement. Overall, the accounting for inventory sales impacts the balance sheet and income statement.
What is the journal entry for Inventory Sale?
The journal entry for inventory sales is straightforward. However, companies must ensure to record both sides of this transaction. As mentioned above, the first side involves recognizing the revenues received from the customer. In this case, the journal entry would be as below.
| Dr | Accounts receivable or Bank or Cash |
| Cr | Inventory sale |
The other side, as stated above, is to record the cost of those goods and the decrease in inventory. The journal entry for this side is as follows.
| Dr | Cost of sales |
| Cr | Inventory |
The first side only records the sale proceeds from the sale. On the other hand, the second recognizes the cost of the inventory sold. The difference between these two figures equals the gross profit or loss on the inventory sale.
Conclusion
Inventory sale refers to the process of selling goods. However, it may also have other meanings based on the context. The accounting for inventory sales considers two aspects of the transaction. It records the sale proceeds while recognizing its cost in two journal entries. Inventory sale is a common process for companies that manufacture or resell items.
Article Source Here: Inventory Sale: Definition, Journal Entry, Accounting Treatment, Formula
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