Preparing Financial Statements for Company B: Journal Entry for December 31, 2020

What would be the journal entry for Company B?

Company A paid for 500 pens last month for $50 each. These pens were shipped out in December but not yet recorded. The shipping cost was already included in the selling price. The cost of each pen to Company B is $10 each.

The Journal Entry For Company B

The journal entry for Company B is Accounts Receivable (or Cash) 25,000; Sales Revenue 25,000 (Debit); Cost of Goods Sold 5,000; Inventory 5,000 (Credit).

To record the transaction in the books of Company B, the following journal entry can be made:

Date: December 31, 2020

1. Increase Accounts Receivable (or Cash) and Sales Revenue:

Debit: Accounts Receivable (or Cash) $25,000 (500 pens x $50 per pen)

Credit: Sales Revenue $25,000

2. Increase Cost of Goods Sold and Decrease Inventory:

Debit: Cost of Goods Sold $5,000 (500 pens x $10 per pen)

Credit: Inventory $5,000

The first entry recognizes the revenue from the sale of the pens, while the second entry records the cost of the pens sold as an expense.

The difference between the sales revenue and the cost of goods sold represents the gross profit for the company.

It's important to note that this journal entry assumes that Company B uses the accrual basis of accounting, where revenue is recognized when the sale is made, regardless of when the cash is received, and expenses are recognized when incurred, regardless of when the cash is paid.