Before we start
The following examples are for a trading business registered for VAT at 15% that uses a perpetual inventory system. Amounts are in SAR. The aim is for you to learn the logic of each entry, not the numbers.
Sales and collection entries
1. Cash sale
Sale of goods for 20,000 SAR before VAT, costing 14,000 SAR.
| Account | Debit | Credit |
|---|---|---|
| Cash on hand | 23,000 | |
| Sales | 20,000 | |
| VAT - output | 3,000 | |
| Cost of sales | 14,000 | |
| Inventory | 14,000 |
2. Credit sale
Sale to a customer for 10,000 SAR before VAT, to be paid within 30 days. (The cost entry is the same as in the previous entry.)
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 11,500 | |
| Sales | 10,000 | |
| VAT - output | 1,500 |
3. Sales returns
The customer returned goods worth 2,000 SAR before VAT, and you issued a credit note. The corresponding cost is also reversed back to inventory if the goods are in good condition.
| Account | Debit | Credit |
|---|---|---|
| Sales returns | 2,000 | |
| VAT - output | 300 | |
| Accounts receivable | 2,300 |
4. Collection from a customer
The customer transferred the remaining balance (11,500 - 2,300 = 9,200 SAR) to the business's bank account.
| Account | Debit | Credit |
|---|---|---|
| Bank | 9,200 | |
| Accounts receivable | 9,200 |
Purchase and payment entries
5. Purchase of goods on credit
| Account | Debit | Credit |
|---|---|---|
| Inventory | 30,000 | |
| VAT - input | 4,500 | |
| Accounts payable | 34,500 |
6. Purchase returns
Returning defective goods to the supplier worth 4,000 SAR before VAT and receiving a credit note from them.
| Account | Debit | Credit |
|---|---|---|
| Accounts payable | 4,600 | |
| Inventory | 4,000 | |
| VAT - input | 600 |
7. Payment to a supplier
Paying the supplier's remaining balance (34,500 - 4,600 = 29,900 SAR) by bank transfer.
| Account | Debit | Credit |
|---|---|---|
| Accounts payable | 29,900 | |
| Bank | 29,900 |
Expense and adjusting entries
8. Salaries
At month end, salaries of 45,000 SAR are recognized as an accrued expense, then settled when paid. Deductions such as the employee's GOSI (social insurance) contribution are separated into their own liability account.
| Account | Debit | Credit |
|---|---|---|
| Salaries expense | 45,000 | |
| Accrued salaries | 45,000 | |
| Accrued salaries (on payment) | 45,000 | |
| Bank | 45,000 |
9. Prepaid rent
Showroom rent for a full year, 60,000 SAR, was paid on 1 January (ignoring VAT for simplicity). It is recorded as an asset, and 5,000 SAR is then charged to expense each month.
| Account | Debit | Credit |
|---|---|---|
| Prepaid rent | 60,000 | |
| Bank | 60,000 | |
| Rent expense (monthly entry) | 5,000 | |
| Prepaid rent | 5,000 |
10. Depreciation
Equipment costing 120,000 SAR, with a useful life of 5 years and no residual value, using the straight-line method: 120,000 ÷ 5 = 24,000 SAR per year, or 2,000 SAR per month.
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 2,000 | |
| Accumulated depreciation - equipment | 2,000 |
How do you make sure your entries are sound?
- Every entry balances: total debits equal total credits.
- Output VAT is reversed on sales returns, and input VAT is reversed on purchase returns.
- The balances of accounts receivable and accounts payable in the general ledger agree with the totals of the subsidiary ledgers.
- Every entry is supported by a document: an invoice, a credit note, a payroll sheet, a lease contract, or a depreciation schedule.
Quick summary of the ten entries
After working through them, here is a short reference table to memorize or pin up in front of you. It shows the logic of each entry regardless of the amounts:
| Transaction | Debit side | Credit side |
|---|---|---|
| Cash sale | Cash on hand or bank | Sales + output VAT |
| Credit sale | Accounts receivable | Sales + output VAT |
| Sales returns | Sales returns + output VAT | Accounts receivable or cash on hand |
| Collection | Bank | Accounts receivable |
| Credit purchase | Inventory + input VAT | Accounts payable |
| Purchase returns | Accounts payable | Inventory + input VAT |
| Payment to supplier | Accounts payable | Bank |
| Recognizing salaries | Salaries expense | Accrued salaries |
| Charging prepaid rent | Rent expense | Prepaid rent |
| Depreciation | Depreciation expense | Accumulated depreciation |
Notice the recurring pattern: every genuine exchange has one side that receives and one side that gives. The debit is what came into the business or what was consumed by it, and the credit is the source of that. Adjusting entries such as depreciation and charging prepaid rent involve no cash outflow, but they are necessary so that the income statement reflects the true cost of each month. If you apply these ten entries accurately, you will cover most of the day-to-day activity in small and medium-sized trading businesses.