How should I record revenue recognition for goods sold on credit?
- Expert answer
- Undergraduate
- Asked
The question
My accounting assignment says a company sold goods worth 18,000 on 30-day credit terms. I need to explain when revenue is recognised and prepare the journal entries.
I am confused because no cash has been received yet, so I do not know whether the sale should be recorded now or later.
Short answer
For goods sold on credit, revenue is usually recognised when control of the goods passes to the customer, not when cash is collected. The entry records revenue and a receivable, then clears the receivable when payment is received.
Full expert answer
Financial accounting tutor
ACA-qualified accounting support specialist
This is a classic accrual accounting question because the sale and the cash receipt happen on different dates. The sale being on credit affects cash timing, not automatically revenue timing. Under IFRS 15, revenue is recognised to show the transfer of promised goods or services to the customer in the amount the business expects to receive.
At undergraduate level, markers usually want more than "debit receivables, credit sales". They want to see that you can identify the performance obligation, decide when control passes, and explain why a receivable is recorded even though cash has not arrived.
What the question is asking
The hidden task is to separate four things:
- the contract or order with the customer
- delivery or transfer of control
- the right to receive cash
- the later receipt of cash
A strong answer explains the revenue recognition principle, applies it to the facts, then shows the journal entries. If the facts mention delivery terms, returns, deposits, discounts or installation, those details matter because they may change when revenue is recognised or how much is recognised.
Method for the answer
Use this structure:
- 1Identify the contract or sale arrangement.
- 2Identify the performance obligation, usually delivery of the goods.
- 3Decide when control passes to the customer.
- 4Measure the transaction price, allowing for discounts or expected returns if the case includes them.
- 5Recognise revenue when the performance obligation is satisfied.
- 6Record a trade receivable if cash has not yet been received.
- 7Record cash later when the customer pays.
In a simple sale of goods, control often passes when the goods are delivered and accepted. But if the seller still has major obligations, such as installation that is not separately identifiable, the timing may be different.
Mini worked example
A wholesaler sells goods for 18,000 on 30-day credit terms. The goods are delivered to the customer on 1 March. There is no right of return, no installation requirement and collection is expected.
The performance obligation is the delivery of goods. Control passes on 1 March, so revenue is recognised on 1 March even though cash is due later.
On delivery:
- Dr Trade receivables 18,000
- Cr Sales revenue 18,000
When the customer pays:
- Dr Cash 18,000
- Cr Trade receivables 18,000
Revenue is not recorded again when cash arrives. The second entry only swaps one asset, receivables, for another asset, cash.
If the customer pays a deposit first
Suppose the customer pays a 5,000 deposit on 20 February and the goods are delivered on 1 March.
On receiving the deposit:
- Dr Cash 5,000
- Cr Contract liability 5,000
The seller has cash, but it has not yet delivered the goods. That means it owes performance to the customer. On delivery, the liability is released and revenue is recognised.
On delivery:
- Dr Contract liability 5,000
- Dr Trade receivables 13,000
- Cr Sales revenue 18,000
This is the part many student answers miss. A deposit is not automatically revenue. It becomes revenue when the seller satisfies the performance obligation.
Sample university-style questions and how to answer them
| Sample question | What a strong answer should do |
|---|---|
| A retailer sells goods on 60-day credit terms. Prepare the journal entries and explain when revenue is recognised. | Recognise revenue when control passes, record a receivable, then clear the receivable when cash is received. Explain that credit terms affect collection, not the existence of the sale. |
| A customer pays a deposit before goods are delivered. Should revenue be recognised immediately? | Usually no. Record a contract liability until goods are delivered or the promised service is performed. |
| Goods are sold with a right of return. How should the seller think about revenue? | Estimate expected returns if the standard and assignment require it. Do not recognise revenue for goods expected to be returned. Mention refund liability and inventory recovery asset only if covered in your module. |
| A company sells goods and provides installation. Is delivery enough for revenue? | Analyse whether installation is a separate performance obligation. If the customer cannot benefit from the goods without installation, some revenue may need to wait. |
| Compare cash sales and credit sales under accrual accounting. | Both can create revenue when control passes. The difference is whether the debit is cash or trade receivables. |
Common mistakes
- Waiting until cash is received even though control has passed
- Recording revenue twice, once at sale and again at payment
- Calling receivables "cash owed" without explaining it is an asset
- Ignoring returns, discounts or variable consideration when the scenario includes them
- Writing only journal entries without explaining control, performance obligation and collection
What earns higher marks
Mention the five-step logic of IFRS 15 if your module expects standards-based discussion. You do not need to quote the full standard, but you should explain contract, performance obligation, transaction price, allocation and recognition when control transfers.
Also explain financial statement impact:
- Income statement: revenue increases profit, assuming related cost is recorded separately.
- Statement of financial position: trade receivables increase until cash is received.
- Cash flow statement: there is no operating cash inflow until the customer pays.
That last point is important. Revenue recognition and cash flow are connected, but they are not the same thing.
Academic use note
This guide is for accounting assignment planning and study support. Apply your own transaction details, module standard and marking rubric before writing your final answer.
Sources and further reading
This answer explains a method for you to apply to your own work. Copying it into a submission would count as plagiarism, and it is indexed by similarity checkers.
All questions