Businesses generate revenues by selling products and services. Under Generally Accepted Accounting Principles, revenues must be recognized on an accrual basis rather than on a cash basis. According to review notes on Lucile Faurel's New York University Stern School website, this means that revenues must be recognized when goods are delivered and services are provided, and when cash collection is reasonably assured.
Input the journal entries for revenues during a period, which can be a month, quarter or year. Debit or increase cash and credit or increase revenues for cash sales. For credit sales, debit or increase accounts receivable and credit revenues. Debit cash and credit or decrease accounts receivable when outstanding bills are settled in cash. Note that the terms “sales” and “revenue” are often used interchangeably.
Account for sales returns and allowances. Returns are items brought back to the store. Allowances are reductions in the original selling price for customers who keep dented and other defective items. Use the "sales returns and allowances" contra revenue account to record both returns and allowances. Contra accounts reduce other accounts, which in this case is revenue. Debit sales returns and allowances, and credit cash when an item is returned or an allowance is offered. Credit accounts receivable instead of cash for a credit sale return or allowance.
Sales allowances are not the same as trade discounts, such as 50 percent off sales or special holiday promotions. These sales are recorded at the discounted price. Some businesses offer cash discounts to customers who settle their credit purchases early: for example, a 2 percent discount for payment in 10 days instead of the normal 30. Debit the “cash discount on revenues” contra revenue account when a customer pays in cash within the discount period.
Record expenses. Under the matching principle, expenses must be recognized in the same period as revenues. The two types of expenses are product costs, which are directly linked to sales, and period costs, such as marketing and administrative expenses. Credit or decrease cash and debit or increase the appropriate expense account. For credit purchases, credit or increase accounts payable. Credit cash and debit or decrease accounts payable when you pay the balance in cash.
Prepare an unadjusted trial balance, which is a compilation of all debit and credit transactions. Check for errors and make the necessary adjustments. Close the temporary revenue and expense accounts at the end of a period, and transfer the net income or loss to the retained earnings account on the balance sheet. Cash, accounts receivable, accounts payable and other balance sheet accounts are permanent accounts that are not closed.