How to Record Revenue on Shipping or an Invoice
- 1). Determine if the earnings process is complete. Consider the earnings process complete when a sale has taken place or a service has been rendered and the buyer has submitted payment or has promised to pay. At the time the sale takes place, delivery terms and the point where the title of goods passes to the buyer are established. When the delivery of goods takes place or services have been rendered, revenue can be recognized. Revenue recognition also requires that evidence of a sale or a service request exists — for example, a signed contract or sales order — the price of the service or goods is fixed and verifiable and collection is expected.
- 2). Record the revenue through a journal entry, once it’s determined that revenue can be recognized. The recording of revenue involves crediting (increasing) a “Sales Revenue” account and debiting (increasing) “Cash” if payment is received up front, or debiting (increasing) “Accounts Receivable” if the sale is made on credit. This entry will increase the income reported on the income statement (gross revenues) and increase assets on the balance sheet (cash or accounts receivable). After the sale is completed, an invoice will be sent out to the buyer if the goods or services were not paid up front.
- 3). Record the receipt of payment on credit sales. Payments on invoices are recorded by debiting (increasing) “Cash” and crediting (decreasing) “Accounts Receivable”. This entry moves the credit sales amount pending collection to the cash account. Notice that a revenue account is not recorded at this time because it was already recorded at the time of sale.