When Processing an Invoice What Account Is Credited?
Master the core concepts of recording business invoices. Gain clarity on how financial transactions are precisely logged to ensure accurate and reliable financial records.
An invoice serves as a formal request for payment or a record of a sale, detailing goods provided or services rendered. It tracks transactions between businesses or with customers. This document provides a clear record of the quantity, price, and terms of a transaction. Proper invoice management is integral to maintaining accurate financial records.
The Basics of Debits and Credits
Every financial transaction involves at least two accounts, a principle known as double-entry bookkeeping. This system ensures the accounting equation—Assets equal Liabilities plus Equity—remains balanced. Debits and credits represent the left and right sides of an accounting entry.
A debit is an entry on the left side of an account, while a credit is an entry on the right. For asset and expense accounts, a debit increases their balance, while a credit decreases it. Conversely, for liability, equity, and revenue accounts, a credit increases their balance, and a debit decreases it. The total debits for every transaction must always equal the total credits, ensuring accurate accounting records.
Recording Purchase Invoices
When a business receives an invoice for goods or services purchased on credit, a financial obligation is created. This transaction recognizes the expense incurred or asset acquired. For example, if a business purchases office supplies on credit, the Office Supplies Expense account is debited. Simultaneously, the Accounts Payable account is credited, establishing a liability owed to the supplier.
Upon payment of this invoice, the liability is settled. The Accounts Payable account is debited, and the Cash account is credited, reflecting the outflow of funds. Businesses retain these invoices for tax compliance and audits.
Recording Sales Invoices
When a business provides goods or services on credit and sends an invoice to its customer, it earns revenue even before receiving cash. This creates an asset for the business, representing the money it expects to collect. For instance, if a consulting firm bills a client, the Accounts Receivable account is debited, reflecting the increase in money owed. Correspondingly, the Sales Revenue account is credited, acknowledging the income generated.
When the business receives payment for this invoice, the outstanding receivable is cleared. The Cash account is debited to show the increase in available funds. At the same time, the Accounts Receivable account is credited, reducing the amount the customer owes and completing the sales transaction cycle.