Post on 17-Jan-2016
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Sales Discounts
Sales and Purchase Discounts Discounts are offered to people who buy on
account either from you – Sales Discounts Or from someone else – Purchase Discounts
The purpose is to encourage people to pay sooner
Think about it: an Accounts Receivable is your money in the hands of someone else – you want your money now!
Sales and Purchase Discount Rules
Rule1. Discounts only
occur when cash changes hands
2. Discounts always appear on the same side as cash
Reason1. This is the only
time you know for sure that someone has paid within the discount period
2. This is because you are accepting less cash for the discount
Sales and Purchase Discount Rules cont.
Rule3. The Discount only
affects Cash
4. Discounts are calculated on total amount owing
Reason3. Same as previous
4. Must pay total amount in order to receive discount
Sales and Purchase Discounts
There are 2 new accounts we will be using for recording Discounts
1. Purchase Discount (When you buy) This is a Contra–Expense Account
2. Sales Discount (When you sell)1. This is a Contra–Revenue Account
Therefore this has a Credit Balance
Therefore this has a Debit Balance
Sales and Purchase Discounts
One last thing about Discounts What are “Terms”? How do we ‘read’
them?
What does 2/10, n30 mean?
2% Discount
If paid within 10 Days
With 30 Days to pay without penalty
Discounts
An Example Jan. 10 – We bought a $1000 worth of
supplies on account. Terms are 2/10, n30. Write this information down!
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jan 10 Supplies 1000
Accounts Payable 1000
Bought supplies, Terms 2/10, n30.
Purchase Discounts Let’s now say that we want to take advantage of
the “Discount” and pay within the allotted time period (in this case it is 10 Days to receive a 2% Discount)
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jan 18 Accounts Payable 1000
Cash 980
Purchase Discounts 20
Sales Discounts Let’s take the same question, only now we
sold instead of bought Jan. 10 – We sold $1000 worth of Supplies on
account. Terms are 2/10, n30.
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jan 10 Accounts Receivable 1000
Sales Revenue 1000
Sold $1000 to J. Doe
Sales Discounts Again, it is now within the 10 Days and our
customer has chosen to take advantage of the Discount
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jan 18 Cash 980
Sales Discount 20
Accounts Receivable 1000
Purchase Discounts If the transaction was for cash (when you
bought supplies) and the discount was taken right away, it would look like this
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jan 10 Supplies 1000
Cash 980
Purchase Discount 20
Sales Discounts If the transaction was for cash (when you
sold supplies) and the discount was taken right away, it would look like this
Date Particulars P.R. Debit Credit
1 1
2 2
3 3
Jan 10 Cash 980
Sales Discount 20
Sales Revenue 1000
The Merchandising Company- Sales and Purchase Discounts
New Account Type of Account
1. Merchandise Inventory Current Asset
2. Sales Revenue
3. Sales Discounts Contra-Revenue
4. Sales Returns & Allowances
Contra-Revenue
5. Purchases COGS (expense)
6. Purchase Discounts COGS (Contra-Expense)
7. Purchase Returns & Allowances
COGS (Contra-Expense)
8. Freight In COGS (expense)
9. Freight Out (Delivery Expense)
Operating Expense
Discounts & the Perpetual System
Your textbook will be assuming the periodic system
As you are aware by this point in the unit, the use of perpetual inventory systems is becoming more popular as technology advances
We MUST understand the difference between the two systems
The Perpetual System
There is no Purchase Discount account under perpetual (Remember, no COGS section on I/S)
Pay for Inventory within the discount period. $1000 2/10, n30
Transaction:Accounts Payable 1000
Cash 980Inventory 20
The Perpetual System
There is a Sales Discount account under the perpetual system
Therefore, sales discounts are treated the same under both systems
Sold Inventory for $1000 2/10, n30 and they pay within the discount period
Cash 980Sales Discount 20
Accounts Receivable 1000
Sales Discounts –Income Statement The total of Sales Returns and Allowances and Sales Discounts is subtracted from
sales Example:
For the month of June, Warrendon`s total sales were $62,000. Some customers returned merchandise (sales returns of $1,500), the amount of sales for the month must be decreased by $1,500. Sales Discounts of $500 were given to customers for early payment, sales must also be decreased by $500.
Sales Discounts –Income Statement Both Periodic & Perpetual
Warrendon Sports
Partial Income Statement
For the month ended June 20, 20-
Revenue
Sales $62, 000
Less: Sales Returns and Allowances $1,500
Sales Discounts $500 $2,000
Net Sales $60,000
Sales & Purchase Discounts Homework Page 311, 9B, 10B Page 312, 12B,C Page 316, 16B