Reporting and Interpreting Sales Revenue

Report
Reporting and Interpreting Sales
Revenue, Receivables, and Cash
Chapter 6
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Accounting for Sales Revenue
The revenue principle requires that
revenues be recorded when earned:
Goods or services have
been delivered.
Amount of customer
payments known.
Collection is
reasonably assured.
When to record a sale?
 When title transfers (risks of ownership).
 Look to the shipping terms
 FOB (Free on board) destination –
 Title transfers when goods reach final destination.
 Seller pays shipping to the final destination.
 FOB (Free on board) shipping point
 Title transfers when goods reach the shipping point (loading
dock)
 Buyer usually pays for shipping to final destination.
Recording a Sale
 Sale for Cash (never a problem)
Cash
Sales
$XXX
$XXX
 Sale on account (focus on these issues)
Accounts Receivable
Sales
$XXX
$XXX
Credit Card Sales
Companies accept credit cards for several reasons:
1. To increase sales.
2. To avoid providing credit directly to customers.
3. To avoid losses due to bad checks.
4. To avoid losses due to fraudulent credit card sales.
5. To receive payment quicker.
When credit card sales are made,
the company must pay the credit
card company a fee for the service
it provides.
Recording a Credit Card Sale
ABC Company sells $1,000 of merchandise to a customer who pays with a Visa credit card.
Visa charges a 2% credit card fee.
Account
Debit
Cash
$980
Credit Card Discount
Sales
Credit
$20
$1,000
Sales Discounts
When customers purchase on open account, they may be offered a
sales discount to encourage early payment.
2/10, n/30
Discount
Percentage
# of Days in
Discount Period
Otherwise, the
Full Amount Is
Due
Read as: “Two ten, net thirty”
Maximum Days in
Credit Period
Recording a Sales Discount
ABC Company sells $10,000 of products to ZYX Company.
ABC offers ZYX a sales discount
2/15, net 30.
Account
Debit
Accounts Receivable
$10,000
Sales
Credit
$10,000
ZYX pays ABC in full in 12 days.
Account
Debit
Cash
$9,800
Sales Discounts
Accounts Receivable
Credit
$200
$10,000
Sales Returns and Allowances
Debited for damaged
merchandise.
Debited for returned
merchandise.
Contra revenue account.
Recording Sales Returns & Allowances
ABC sells $5,000 of merchandise to MNO Company on account.
Account
Debit
Accounts Receivable
$5,000
Sales
Credit
$5,000
MNO returns $1,000 of merchandise that was not of sufficient
quality.
Account
Debit
Sales Returns
$1,000
Accounts Receivable
Credit
$1,000
Recording Sales Returns & Allowances
 MNO contacts ABC over certain merchandise that was sent of a
different color than was ordered. NMO asks for and is granted an
allowance of $250.
Account
Debit
Sales Returns and Allowances
$250
Accounts Receivable
Credit
$250
 MNO pays the remainder of the amount owed to ABC (no
discount).
Account
Cash
Accounts Receivable
$3,750
$3,750
Recording Sales Returns & Allowances
 What if ABC had granted MNO a discount of 4/10, net 30
for paying early. What entry is made if MNO pays what they
owe ABC within the discount period?
Accounts
Debit
Cash
$3,600
Sales Discounts
Accounts Receivable
Credit
$150
$3,750
Reporting Net Sales
Companies record credit card discounts,
sales discounts, and sales returns and allowances separately
to allow management
to monitor these transactions.
Sales revenue
Less: Credit card discounts
Sales discounts
Sales returns and allowances
Net sales
Do E6-3
Issues with the Other Side of the
Transaction
Accounts Receivable
Measuring and Reporting Receivables
When companies allow customers to purchase merchandise on an
open account, the customer promises to pay the company in the
future for the purchase.
Accounts Receivable
Trade receivables are amounts
owed to the business for credit
sales of goods, or services.
Nontrade receivables are amounts
owed to the business for other
than business transactions.

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