Closing the sale for accounting

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okay so this is a journal entry that talks about this is a typical standard sales journal entry so you have a corporation that has a grand opening which is always fun and makes its first sale it's sold a watch all right and it's sold it on account then that costs $200 so what's the journal entry here for this one well I we start with the things we can touch so inventory is leaving inventory is an asset this watch is an asset it is leaving meaning it is reducing it is reducing our assets all right and so that means it's gonna be a credit so we go credit right here credit and we're gonna have some sort of inventory here some sort of inventory account you could do watch inventory you could call it a lot of things just making sure you put inventory on it as long as you call it inventory you'll be good so inventory and the inventory cost us $200 again I was like to start with the things that can touch so the inventory cost $200 and that's what we got rid of we got rid of in the sale all right there's gonna be a corresponding entry to that and the corresponding entry to that is going to be a debit and that debit is gonna be related to costs of goods sold cost of goods sold this is our core business right this is what we do and so because it's what we do we're not going to net these two we actually have to track it right so inventories going down and we want to show that that inventory was worth something it was worth $200 right everything on this side of the equation is basically resources and everything on this side of the equation is kind of the allocation of who owns or has rights to the different resources and how they're tracked all right and on this side of the equation right over here on this side we are putting that inventory is decreasing so let me do a fix on that inventory inventory is decreasing by 200 all right and the corresponding debit is cost of goods sold for 200 all right now we're not done we're not done because we have revenue right we have revenue and we also have accounts receivable so this watch was sold on account so we didn't get a cash get cash for it we got an IOU and that IOU is an asset it is a resource it's a promise and it's you can't touch it but it is a promise of research a promise and a commitment and if you don't collect it you can either take them to total court take them small claims make them pay assume any number of things and we always sell the people that are gonna pay so in in this one what you do is you're gonna have a debit and then you're gonna have a credit and your debit is gonna be for accounts receivable all right your accounts receivable is for $800 right that's the $800 that you receive a promise for for selling the watch so and what the tracking is of that how we track that is with revenue so this is revenue you could call it sales revenue you call it design why don't you call it sales of revenue you should be pretty good with whoever you're doing these entries for just to make it clear about what's going on and that's going to be a credit and how that comes in is that we have this account receivable of 800 here down here on our assets and then we have revenue which is going to be recorded here revenue of $800 and we want to have this itemized you might have been tempted to go just to do something like 800 minus 200 and then get 600 and the reality is is yeah that's our net income right from this right so that's our netting from it the 800 - the 200 but the thing is is with accounting we want to track the revenue and expenses specific to the account so we're gonna label this revenue we're gonna label this expense and we're not going to report a net amount what do I mean by that some of you might have and again this is the wrong way to do it you don't want to do it this way all right the wrong way to do this would be to do something along the lines of well you have a credit inventory of an inventory of 200 and you might be tempted to say well I also have a debit to accounts receivable so a our accounts receivable of 800 so I know I have that and maybe just maybe I can credit and make this all balanced by making it a gain and if you did this you did it wrong wrong in this gain of $600 you're like well it's the same thing isn't it net net don't I get this no no that's so wrong don't do this it's so bad we only do gains like this when we're selling something that's not part of our core business all right so in the meth-lab example it is the smooshed is the smooshed RV that we cook our method right and in a lemonade stand example it is selling selling you're selling the the you know your picture not the lemonade but the picture to someone that comes by and says they want we'll need a picture like that and you have a spare it is something you buy or sell or get rid of that is not part of your core purpose of the business that's what gains and losses are it's things that are bought or sold or losses are frequently just impairments that happen that are not part of the core thing you don't want to be doing that so this is the wrong way to do it what you want to do is itemize each one