Chapter 3: Merchandise Sales

Accounting for Merchandise Sales, Discounts, Returns, and Allowances Merchandising companies must track various aspects of their sales process, including revenue from sales, cash discounts offered, returns, allowances, and cost of goods sold. Below is an analysis of these processes using a perpetual inventory system, with journal entries recorded as transactions occur. 1. Sales Without Cash Discounts When merchandise is sold, two entries are made for every sale: • • Revenue side: Record the inflow of assets (Accounts Receivable or Cash) and increase revenue (Sales). Cost side: Record the outflow of assets, decreasing Merchandise Inventory and recognizing the Cost of Goods Sold (COGS). For example, if Z-Mart sells $1,000 of merchandise on credit with terms n/60 (no discount), and the cost of the merchandise is $300: • • Revenue Side: o Debit Accounts Receivable $1,000 o Credit Sales $1,000 Cost Side: o Debit Cost of Goods Sold $300 o Credit Merchandise Inventory $300 This entry reflects both the revenue generated and the cost incurred for the sale, leading to a gross profit of $700 ($1,000 sales - $300 COGS). 2. Sales with Cash Discounts Offering discounts encourages quicker payment, reducing collection efforts. For example, 2/10, n/45 terms mean a 2% discount is available if the customer pays within 10 days; otherwise, full payment is due in 45 days. Recording Sales on Credit: Assume Z-Mart sells $1,000 of merchandise (costing $300) on credit terms of 2/10, n/45: • • Revenue Side: o Debit Accounts Receivable $1,000 o Credit Sales $1,000 Cost Side: o Debit Cost of Goods Sold $300 o Credit Merchandise Inventory $300 Buyer Pays within Discount Period: If the buyer pays within the 10-day discount period, they pay $980 (after a 2% discount on $1,000), and Z-Mart records the discount: • Debit Cash $980 o Debit Sales Discounts $20 (a contra-revenue account) o Credit Accounts Receivable $1,000 Buyer Pays after Discount Period: If the customer pays after the discount period, Z-Mart records the full payment: • Debit Cash $1,000 o Credit Accounts Receivable $1,000 3. Sales Returns and Allowances When a buyer returns merchandise or receives a price reduction (allowance), the seller must adjust both the revenue and cost sides. Buyer Returns Goods: If a customer returns merchandise, Z-Mart debits Sales Returns and Allowances (a contra-revenue account) and adjusts its inventory accordingly. Assume a customer returns merchandise that sold for $15 and cost $9: • • Revenue Side: o Debit Sales Returns and Allowances $15 o Credit Accounts Receivable $15 Cost Side: o Debit Merchandise Inventory $9 o Credit Cost of Goods Sold $9 Buyer Granted Allowances: If Z-Mart grants a price reduction (allowance) instead of accepting returns, the seller adjusts the buyer's account but does not change inventory. For example, ZMart grants a $10 allowance for defective goods: • Debit Sales Returns and Allowances $10 o Credit Accounts Receivable $10 If the customer already paid in cash, the seller would return the allowance amount as cash: • Debit Sales Returns and Allowances $10 o Credit Cash $10 Example Journal Entries for Sales Transactions: Using the perpetual inventory system and the gross method, consider these transactions: a. Sale of Merchandise: On June 1, Z-Mart sells 50 units at $150 per unit (terms: 2/10, n/30, FOB shipping point), and the merchandise cost $100 per unit: • • Revenue Side: o Debit Accounts Receivable $7,500 (50 × $150) o Credit Sales $7,500 Cost Side: o Debit Cost of Goods Sold $5,000 (50 × $100) o Credit Merchandise Inventory $5,000 b. Customer Returns 2 Units: The customer returns 2 units ($150 per unit, cost of $100 each). Z-Mart restores the inventory and adjusts Accounts Receivable: • • Revenue Side: o Debit Sales Returns and Allowances $300 (2 × $150) o Credit Accounts Receivable $300 Cost Side: o Debit Merchandise Inventory $200 (2 × $100) o Credit Cost of Goods Sold $200 c. Customer Pays Balance Due: After the return, the customer pays the remaining balance of $7,200 within the discount period (2/10). The payment with a 2% discount is $7,056: • Debit Cash $7,056 o Debit Sales Discounts $144 (2% of $7,200) o Credit Accounts Receivable $7,200 d. Allowance for Damaged Goods: The customer keeps 10 damaged units and receives a $50 allowance: • Debit Sales Returns and Allowances $50 o Credit Cash $50 Key Points in Summary: • • • Sales: Recorded as revenue and the corresponding COGS. Discounts: Recorded as Sales Discounts, a contra-revenue account. Returns and Allowances: Adjust both revenue (via contra-revenue accounts) and COGS (if goods are returned).