Cash Sales

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A cash sale is a business transaction in which the buyer pays for goods or services at the time of the purchase. In a cash sale, payment is immediate. How the buyer pays doesn’t matter, as long as there is a transfer of monies. It can be: 

  • Cash: The buyer counts the bills and coins and hands it over to the seller. 
  • Card: Whether it’s debit or credit, it is a cash sale if presented at the time of purchase. The buyer presents a card, and the purchase amount is instantly deducted from the buyer’s bank account and credited to the seller’s bank account.
  • PayPal or any other digital platform, e.g., Payoneer, Payza, Perfect Money, Stripe, etc.
  • Cryptocurrency: Internet-based money, including Bitcoin, Ripple, Litecoin, etc.
  • Checks: the payment for goods and services using paper “promises,” which the seller can easily deposit into their account.

Recording Cash Sales

At the end of each cash sale, the seller will account for it in some sort of ledger. A popular accounting format is called the cash receipts journal. Businesses use a cash receipts journal to record cash sales of inventory.

If a product sold does not include any taxes, then recording the transaction is straightforward. No calculations are needed! 

Cash                    Total Amount
Sales                  Sales Amount

“Total Amount” represents the total amount of the sale. This label will change with each transaction. “Sales” represents the name of the actual commodity that is sold. “Sales Amount” is the amount for which the product is sold. If these the two amount terms confuse you, think of “Total Amount” as the overall amount received within a day or the expected total amount of an item. The “Sales Amount” is the amount you received for the item at the time of purchase. You will be able to see the difference much easier later in the article when deductions are incorporated.

Example 1

Frenzo is a shoemaking company that specializes in making luxury shoes. Its hand-stitched shoes are called Frenzo Comfits, and a pair costs $450. At the end of last month, Fenzo sold 1,270 hand-stitched shoes in different cities. There are no taxes on Frenzo shoes.

Record the cash sales of Frenzo Comfits in a cash receipt journal.

Since the record in the cash receipt journal is for the month, we will have to first calculate the total amount of cash for all the shoes that Frenzo sold during the month.

The price per Frenzo Comfits is $450. The total number of Frenzo Comfits sold in the month is 1, 270.

Therefore, the total sales of Frenzo Comfits in the month is:

$450 * 1270

= $571,500

Now that we know the total cash for sales in the month let us record it in our journal.

Cash                                               $571,500
Frenzo Comfits                               $571,500

The total cash that Frenzo received from customers for the sale of Frenzo Comfits is $571,500. We do not have to deduct anything from the money collected as there were no taxes.

Recording Cash Sales with Deductions

There are, however, some items that are taxed by the government. It is the responsibility of the seller to collect these taxes. One of the most popular government taxes on items come in Value Added Tax (VAT). Sellers receive both the actual price of the item they are selling and the VAT on the item, which they will later hand over to the government.

When taxes are involved, we use a different journal format to accommodate the tax on the item.

Cash                    Total Amount
Sales                     Sales Amount
Sales Tax               Tax Amount
Total\: Amount = Sales\: Amount + Tax\: Amount

“Sales” stand for the name of the item that is sold.

“Sales Amount” is the original price of the item before taxes are added. It represents the price at which the company will sell the item if there are no taxes.

“Tax Amount” is the tax that the seller will collect from customers for each item sold. Tax is a pre-set percentage of the actual price of the item. For example, if the VAT for a gold-plated watch is 5%, then the Tax Amount will be 5% of the sales price of the watch.

Tax\: Amount = Percentage\: of\: Sales\: Amount

Remember that the customers pay the tax, not by the company selling the items. The company simply has to turn over this money to the government.

Example 2

Costi is a Miami-based retail luxury shop that sells watches, handbags, necklaces, and chains. At the end of the day, Costi sold 320 gold-plated wrist watches, each for $670. Customers paid for the watches in cash. The Value Added Tax on luxury goods in Miami is 10%.

Record the day’s sales of wristwatches in a cash receipts journal.

The first step is to calculate the total amount of sales of the gold-plated watches.

$670 * 320 = $214,400

However, the VAT on the watches is 10%. Calculate the tax amount on the watches.

10% of $214,400

0.1 * $214,400

= $21,440

The total VAT on the watches sold by Costi is $21,440.

The next calculation you will have to make is the total amount Costi will collect from its customers, which is the sum of the sales and the VAT.

Total cash collected from customers = $214,400 + $21,440

                                                          = $235,840

The total amount of cash that Costi will receive from its customers is $235,840.

This is how it would we would represent it in our journal.

Cash                                             $235,840
Wristwatches (Gold)                     $214,400
Tax Payable                                   $21,440

If you were to pick up a cash journal, you would immediately be able to see how much that company or business will be paying the government. You can, in theory, also figure out how much their sales tax is if you don’t have it handy.

Conclusion

In review, cash sales are a type of transaction where the seller receives payment immediately for goods sold. Sellers typically prefer cash sales because it eliminates the risk of bad debts, where customers do not pay the debt they owe the business. Furthermore, companies will not need to spend resources chasing accounts receivables from customers. So if you are a vendor, aim to maximize cash sales to avoid overdue credits and working with debt collectors.