Recording Sales and Customer Payments: Cash vs. Credit Transactions

Why “cash vs. credit” matters in revenue workflows

Revenue-related transactions often look similar to customers (they buy, they pay), but they affect your books differently depending on timing. The key question is: did you receive the money at the same time you made the sale?

• Cash sale: the customer pays immediately (cash, card, bank transfer at checkout). You increase Cash and record Revenue (and Sales Tax Payable if you collect tax).
• Credit sale: you deliver now but the customer will pay later (invoice terms). You increase Accounts Receivable (A/R) and record Revenue (and Sales Tax Payable if applicable).
• Customer payment on account: you receive money later for an invoice. You increase Cash and reduce A/R. This payment does not create new revenue because the revenue was recorded when you invoiced.

Recording a cash sale (paid immediately)

What accounts are typically involved

• Cash (or a specific bank/merchant account): increases
• Sales Revenue: increases
• Sales Tax Payable (if you collect sales tax/VAT-type tax on behalf of a tax authority): increases

Step-by-step: cash sale with sales tax

Scenario: You sell goods for $100 plus 10% sales tax. Customer pays immediately by card. Total collected = $110.

1. Confirm the taxable amount and tax rate.
2. Calculate sales tax collected: $100 × 10% = $10.
3. Record the receipt of cash and split the total into revenue and tax liability.

Common checkpoint: Sales tax collected is not revenue. It is money you owe to the tax authority until you remit it.

Recording a credit sale (issuing an invoice)

What changes compared to a cash sale

With an invoice, you record the sale even though you have not received the money yet. Instead of increasing Cash, you increase Accounts Receivable for the customer’s balance due.

Step-by-step: issuing an invoice with sales tax

Scenario: You issue Invoice #105 to Customer A for services: $500 plus 10% sales tax. Total invoice = $550, due in 30 days.

Continue in our app.

You can listen to the audiobook with the screen off, receive a free certificate for this course, and also have access to 5,000 other free online courses.

Or continue reading below...

Download the app

1. Create the invoice with date, customer, description, quantity/price, tax, and total.
2. Separate the invoice total into revenue and sales tax collected.
3. Record the invoice as an increase to A/R (customer owes you).

Practical tip: track A/R by customer

A/R is one account in the general ledger, but you typically also maintain a customer-level list (often called a customer ledger or A/R subledger). Each invoice and payment should be tied to a customer so you can answer: “Who owes us what?”

Receiving customer payments (reducing Accounts Receivable)

What a customer payment does (and does not do)

• Does: increase Cash and reduce A/R.
• Does not: increase Sales Revenue again (because the sale was already recorded when invoiced).

Step-by-step: full payment of an invoice

Scenario: Customer A pays the full $550 for Invoice #105 by bank transfer.

1. Match the payment to the correct customer and invoice number.
2. Record the deposit to Cash.
3. Reduce Accounts Receivable for the amount paid.

Step-by-step: partial customer payment

Scenario: Customer B has an outstanding invoice balance of $330. They pay $200 today.

1. Apply the $200 payment to Customer B’s open invoice(s).
2. Record the cash received.
3. Reduce A/R by $200; the remaining balance stays open.

After posting: Customer B still owes $130 ($330 − $200).

Handling “unapplied” payments (basic)

Sometimes a payment arrives without enough detail to match it to an invoice. At a basic level, you can temporarily record it as a reduction to A/R for that customer (or to a short-term holding account used by your business) and then apply it to the correct invoice once clarified. The goal is to avoid leaving Cash unrecorded while you investigate.

Customer refunds and credit memos (basic handling)

Two common situations

• Credit memo (reduces what the customer owes): used when the customer is on credit and you are reducing or canceling an invoice (returns, pricing correction, service issue).
• Refund (cash goes back to the customer): used when the customer already paid and you return money.

Credit memo against an unpaid or partially paid invoice

Scenario: Customer C was invoiced $220 total (includes tax). You approve a $55 credit (includes tax) due to a billing error. Customer has not paid yet.

A basic credit memo reduces the customer’s A/R balance and reduces the amounts originally recorded (revenue and tax). If your system allows, it will automatically calculate the tax portion.

Checkpoint: The customer now owes $165 instead of $220.

Refund after the customer has paid

Scenario: Customer A paid $550, but you later refund $110 (includes tax) for a partial return.

At a basic level, the refund reduces Cash and reduces the original sale amounts. If the refund is issued after payment, A/R may already be zero; the refund should not create a negative A/R unless you intend to show the customer has a credit balance.

Practical note: Some businesses record refunds using a separate contra-revenue account (e.g., Sales Returns). At a basic level, the key is that refunds reduce net sales and reduce tax payable if tax is refunded.

Mini exercise: update Accounts Receivable and Cash

Instructions

Post the following transactions and then confirm (1) total A/R balance, (2) Cash increase from payments received, and (3) Customer A’s ending balance.

Assumptions: Ignore sales tax for this exercise (treat invoice totals as the amounts to record). Beginning balances: Cash = $0, Accounts Receivable = $0.

Transactions

• Invoice #201 issued to Customer A: $400
• Invoice #202 issued to Customer B: $250
• Invoice #203 issued to Customer A: $150
• Payment received from Customer A applied to Invoice #201: $300 (partial payment)
• Payment received from Customer B applied to Invoice #202: $250 (full payment)

Work area (fill in the amounts)

Check your results

• Cash ending balance: $550
• Accounts Receivable ending balance: $250
• Customer A ending balance: $250 (Invoice #201 remaining $100 + Invoice #203 $150)

Optional challenge: add a credit memo

Add a $50 credit memo for Customer A applied to Invoice #203. Update Customer A’s balance and total A/R. (Hint: A/R decreases by $50.)