Final answer:
To record sales on account, debit Accounts Receivable and credit Sales Revenue for the total amount sold to customers. In the given example, a business would record a $6,900 debit to Accounts Receivable and a $6,900 credit to Sales Revenue. The business's accounting profit, in a different example, would be $50,000 calculated by subtracting total explicit costs from sales revenue.
Step-by-step explanation:
Journal Entry for Sales on Account
When a business makes sales on account, it must record the transactions in its accounting ledger to keep track of the amounts owed by each customer. The journal entry to record these transactions should reflect the increase in accounts receivables and the increase in sales revenue.
In this particular case, the business sold services to three customers on account. The cumulative sales amount was $1,500 to J. Simmons, $4,200 to A. Jones, and $1,200 to J. Williams, totaling $6,900. The journal entry would be:
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- Debit Accounts Receivable $6,900
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- Credit Sales Revenue $6,900
This double-entry ensures that the accounting equation remains balanced. It shows that there is an increase in assets (Accounts Receivable) because the customers owe money for the services provided, and there is an equivalent increase in owners' equity (Sales Revenue), reflecting the earnings from sales.
Accounting Profit Example
Using the provided self-check question, we calculate a firm's accounting profit by subtracting its explicit costs from its total revenues. If a firm had sales revenue of $1 million and spent $600,000 on labor, $150,000 on capital, and $200,000 on materials, its accounting profit can be calculated as follows:
$1,000,000 (Sales Revenue) - ($600,000 (Labor) + $150,000 (Capital) + $200,000 (Materials)) = $50,000 (Accounting Profit)