# Accounting for Cash Sales

Cash sales are sales made against cash. It is where the seller receives the cash consideration at the time of delivery. Unlike credit sales, cash sales do not result in accounts receivable. It is not necessary that the seller must receive the currency notes to qualify a sale as cash sale. Sales involving direct immediate transfer to the seller bank account or payments through credit cards are also cash sales.

Accounting for cash sales depends on whether any sales tax or value-added tax (VAT) or any other indirect tax is applicable to the products sold. If sales tax or VAT is not applicable, the sale is recorded as follows:

 Cash A Sales A

If any indirect tax is applicable, the seller is required to collect a certain percentage of the retail price as sales tax or VAT and pay it to the government. Cash received from cash sales to which sales tax or VAT applies is sum of the actual retail price and the sales tax collected on the behalf of the government. This transaction results in increase in cash, recognition of revenue and also gives rise to a liability, sales tax payable. A taxable credit sale is recorded as follows:

 Cash A Sales B Sales tax payable C

Where A is the actual cash received, B is the retail price before sales tax, C is the sales tax collected on the sale and D is the percentage rate applicable on the transaction.

C and A are given by:
C = B × D%
A = B + C

## Example

Havana Refreshments (HR) sells hand-rolled cigars and rich fresh cocktails. A pack of cigar is sold at \$25 and each glass of cocktail juice has a price of \$10. 50% tobacco tax (which is an indirect tax) applies to cigars. On 29 August 2014, HR sold 150 packs of cigars and 500 glasses of cocktail juices all on cash.

Required: Journalize the transactions.

Solution

Since juices don’t carry any taxes, recording juice sale is pretty straightforward. Total amount of juice sales is \$5,000 [= 500 × \$10]. The following journal entry is required.

 Cash \$5,000 Juice sales \$5,000

Cigars carry 50% tobacco tax. Total value of sales is \$3,750 [= 150 × \$25]. Amount of tobacco tax is \$1,875. Cash to be collected from customers is \$5,625 [= \$3,750 + \$1,875]. This would be journalized as follows:

 Cash \$5,625 Cigar sales \$3,750 Tobacco tax payable \$1,875

XPLAIND.com is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!