Merchandising Operations and the Accounting Cycle - Pearson

STOP & THINK
Why is there no January 19 entry to Sales Revenue, Cost of Goods Sold, or Inventory?
Answer: On January 19 the seller merely receives one asset—Cash—in place of another
asset—Accounts Receivable. The sales revenue, the related cost of goods sold, and the decrease
in inventory for the goods sold were recorded on January 11. Examine the two entries
on January 11.
Offering Sales Discounts and Sales Returns
and Allowances
We just saw that purchase discounts and purchase returns and allowances decrease
the cost of inventory purchases. In the same way, sales discounts and sales returns
and allowances, which are contra accounts to Sales Revenue, decrease the revenue
earned on sales.
Credit subtotal
Credit-balance Debit-balance accounts (not a separate
account account)
Sales
Sales
Sales Returns
Net sales
–
–
=
Revenue Discounts and Allowances revenue*
*Often abbreviated as Net sales.
This equation calculates net sales. Note that sales discounts can be given on both
goods and services.
Companies keep close watch on their customers’ paying habits and on their own
sales of defective and unsuitable merchandise. They maintain separate accounts
for Sales Discounts and Sales Returns and Allowances. Let’s examine a sequence of
the sale transactions of JVC. Assume JVC is selling to Austin Sound Centre Inc.
On July 7, JVC sells stereo components for $7,200 on credit terms of 3/15 n/30.
These goods cost JVC $4,700. JVC’s entries to record this credit sale and the related
cost of goods sold are:
July 7 Accounts Receivable ................................................. $7,200
Sales Revenue........................................................ $7,200
Sale on account.
July 7 Cost of Goods Sold .................................................... $4,700
Inventory................................................................ $4,700
Recorded the cost of goods sold.
Assume the buyer, Austin Sound Centre Inc., returns goods that were sold by
JVC for $600. These goods are not damaged and can be resold. JVC records the
sales return and the related decrease in Accounts Receivable as follows:
July 12 Sales Returns and Allowances.................................. 600
Accounts Receivable............................................. 600
Received returned goods.
JVC receives the returned merchandise and updates the inventory records. JVC
must also decrease cost of goods sold as follows (these goods cost JVC $400):
July 12 Inventory ..................................................................... 400
Cost of Goods Sold ............................................... 400
Returned goods to inventory.
KEY POINT
A contra account always has a
companion account with the
opposite balance. Thus both Sales
Discounts and Sales Returns and
Allowances (debit balances) are
reported with Sales Revenue
(credit balance) on the income
statement.
KEY POINT
The sale of inventory and the
return of goods by customers
require two separate journal
entries.
Chapter Five Merchandising Operations and the Accounting Cycle 233