Sales Discounts

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Unit 4
Chapter 10: Accounting for Merchandising
Operations
Thursday : Summative review
Friday : Summative review
Monday : Summative
Let’s vote about summative date.
Remember the HW rule:
1. 1% bonus mark
2. Formula Sheet
Cash Refunds
• There is one term that I did not mention from yesterday’s
lesson.
Cash Refunds
• Sometimes cash sale is as common as credit sale.
• A customer who paid cash at the purchase date, might
want to return the goods and get cash refund.
• In principle, accounting for refunds is similar to that for
credit invoices.
• However when a refund is given instead of issuing credit
invoice, we will now issue check or give cash back to the
customer.
Revised Cost of Goods sold
• Remember from previous lesson that COGS
• COGS =BI + Purchase – EI
• COGS = BI + Net Purchase – EI
• BI = Beginning Inventory
• EI = Ending Inventory
• COGS = Cost of Goods sold
• Net Purchase = Purchase account – Purchase
Returns and allowance account
Sales Discounts
1.Cash discounts is a reduction of the amount of an
invoice if payment is made on or before the discount
date, (which is stated on the invoice.)
Terms of Sale
• Talk about a meeting Samsung and Bestbuy
• Every businesses arranges with their customers as to
• when the goods of service are to be paid for
• Whether a cash discount is offered.
• This arrangement is called “Terms of Sale”.
Terms of Sale
• Common Examples of Terms of Sale in
business are:
1. COD = Cash on Delivery
2. Net 30
3. Net 60
4. 2/10, n/30
5. 1/15, n/30
Terms of Sale
• Common Examples of Terms of Sale in business are:
1. COD = Cash on Delivery : The goods must be paid
for at the time they are delivered. This is the most
common example of Terms of Sale. COD is common
in retail business such as Tim Horton, Dollarama and
Wal-mart.
2. Net 30 : The full amount of the invoice is due 30 days
after the date of the invoice.
3. Net 60 : The full amount of the invoice is due 60 days
after the date of the invoice. Sixty day terms are
becoming less common.
Terms of Sale
• Common Examples of Terms of Sale in business are:
1. 2/10, n/30 = Two ten net thirty = If the bill is paid
within 10 days of the invoice date, a cash
discount of 2% is taken. Otherwise, the full
amount of the invoice is due 30 days after the
invoice date. (most common practice in business)
2. 1/15, n/30 = One fifteen net thirty = If the bill is
paid within 15 days of the invoice date, a cash
discount of 1% is taken. Otherwise, the full
amount of the invoice is due 30 days after the
invoice date.
Sales Discounts
• Which one of the 5 terms of sale is the most favorable for
the seller? (=vendor)
• COD
• Which one of the 5 terms of sale is the most favorable for
the purchaser? (or buyer)
• Net 60 and 2/10, n/30
• The terms of sale depend on the customer’s reputation
for reliability in paying.
• A reliable customer of long standing will probably be
granted very favorable terms.
• When the seller makes sales invoice, they always remind
the buyer about the terms in its sales invoice. Page 428
shows an example.
Accounting for Cash Discounts
• Accounting for cash discounts begins when the
credit sale is made.
• In the books of the buyer
• On Feb 1, Bestbuy (retail store) bought USBs worth
$411.90 + HST = $465.45 with “2/10, n/30” term:
Purchases
HST Recoverable
Accounts Payable
Dr.
$411.90
$53.55
Cr.
465.45
Accounting for Cash Discounts
• 2% = 0.02 * 411.90 = 8.24
• If the buyer pays in 10 days, (on Feb 8) then the
accounting entry would be:
Feb 8
Dr.
Accounts Payable
465.45
Purchase Discounts
Bank
Paid Invoice #1235 with 2% discount
Cr.
8.24
457.21
***Purchase Discounts = Discounts earned
Accounting for Cash Discounts
In the books of the seller (Kingston, manufacturer)
When they sold the USBs on Feb 1:
Dr.
Cr.
Accounts Receivable
465.45
Sales
411.90
HST Payable
53.55
As the accounting clerk receives the check, they make sure
that the payment has been received within 10 days.
Accounting for Cash Discounts
In the books of the seller (Kingston, manufacturer)
On Feb 8, when they received the check with discount
amount:
Dr.
Cr.
Bank
457.21
Sales discounts
8.24
Accounts Receivable
465.45
*** Sales Discounts = “Discounts allowed” account
Revenue (P431)
Sales
Less: Return and Allowances
Sales Discounts
Net Sales
Cost of Goods sold
Inventory Jan 1
Purchases
Less: Returns and allowance
Purchase Discounts
Net Purchases
Freight In
Cost of goods available for sale
Less Inventory,December 31
COGS
403955
21151
(5296) 26447
377508
72074
233567
(18356)
(4358)
210853
5731
288658
83562
205096
Classwork / Homework for
Monday class
P432 Ex 1, 2, 3 and 4
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