What discount benefits a seller through earlier cash receipts and reduced collection efforts?
|
EXHIBIT 5.9 Gross Profit Computation  Sales of Merchandise Each sales transaction for a seller of merchandise involves two parts.
Accounting for a sales transaction under the perpetual system requires recording information about both parts. This means that each sales transaction for merchandisers, whether for cash or on credit, requires two entries: one for revenue and one for cost. To illustrate, Z-Mart sold $2,400 of merchandise on credit on November 3. The revenue part of this transaction is recorded as This entry reflects an increase in Z-Mart’s assets in the form of accounts receivable. It also shows the increase in revenue (Sales). If the sale is for cash, the debit is to Cash instead of Accounts Receivable. The cost part of each sales transaction ensures that the Merchandise Inventory account under a perpetual inventory system reflects the updated cost of the merchandise available for sale. For example, the cost of the merchandise Z-Mart sold on November 3 is $1,600, and the entry to record the cost part of this sales transaction is
Sales Discounts Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts. At the time of a credit sale, a seller does not know whether a customer will pay within the discount period and take advantage of a discount. This means the seller usually does not record a sales discount until a customer actually pays within the discount period. To illustrate, Z-Mart completes a credit sale for $1,000 on November 12 with terms of 2/10, n/60. The entry to record the revenue part of this sale is This entry records the receivable and the revenue as if the customer will pay the full amount. The customer has two options, however. One option is to wait 60 days until January 11 and pay the full $1,000. In this case, Z-Mart records that payment as The customer’s second option is to pay $980 within a 10-day period ending November 22. If the customer pays on (or before) November 22, Z-Mart records the payment as Sales Discounts is a contra revenue account, meaning the Sales Discounts account is deducted from the Sales account when computing a company’s net sales (see Exhibit 5.9). Management monitors Sales Discounts to assess the effectiveness and cost of its discount policy. Sales Returns and Allowances
Sales Returns To illustrate, recall Z-Mart’s sale of merchandise on November 3 for $2,400 that had cost $1,600. Assume that the customer returns part of the merchandise on November 6, and the returned items sell for $800 and cost $600. The revenue part of this transaction must reflect the decrease in sales from the customer’s return of merchandise as follows: p. 189If the merchandise returned to Z-Mart is not defective and can be resold to another customer, Z-Mart returns these goods to its inventory. The entry to restore the cost of such goods to the Merchandise Inventory account is This entry changes if the goods returned are defective. In this case the returned inventory is recorded at its estimated value, not its cost. To illustrate, if the goods (costing $600) returned to Z-Mart are defective and estimated to be worth $150, the following entry is made: Dr. Merchandise Inventory for $150, Dr. Loss from Defective Merchandise for $450, and Cr. Cost of Goods Sold for $600.
Sales Allowances To illustrate sales allowances, assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction. Z-Mart records this allowance as follows:
Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?trade discounts. Cash discounts aren't reductions in the agreed sales price of the goods or services at the time of the transaction – they are a reduction in the amount to be paid by a credit customer (to whom you have given credit terms) if that customer pays within a specified time period.
What is a sales discount in accounting?A sales discount is a reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer. A sales discount may be offered when the seller is short of cash, or if it wants to reduce the recorded amount of its receivables outstanding for other reasons.
How are discounts treated in accounting?When the seller allows a discount, this is recorded as a reduction of revenues, and is typically a debit to a contra revenue account. For example, the seller allows a $50 discount from the billed price of $1,000 in services that it has provided to a customer.
Where does sales discounts go on the income statement?Reporting the Discount
Report the amount of total sales discounts for an accounting period on a line called “Less: Sales Discounts” below your sales revenue line on your income statement. For example, if your small business had $200 in discounts during the period, report “Less: Sales discounts $200.”
|
