Reporting and Interpreting Sales Revenue

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.