11-1

SALES AND PURCHASES

CHAPTER 11CHAPTER 11

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How does a company attempt to earn an

income?

SalesSales

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selling products or merchandise

Income

buying products or merchandise

Sales

SalesSales

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SalesSales

Revenues from sales

cost of goods sold

operating expenses

gross margin from sales (gross margin or profit)

factors concerning sales?

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Net Income

gross margin from sales (gross margin or profit)

SalesSalesRevenues from sales

cost of goods sold

operating expenses

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To be great enough to pay for cost of goods sold and operating expenses and to provide a sufficient net income

SalesSalesNet sales= gross proceeds from sales of merchandise - sales returns-allowances -sales discounts.

The increasing of sales indicates the potential growth and the decreasing means the possible decreased earnings and other financial problems in the future.

Net sales:

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SalesSales

Gross sales consist of total sales on cash and sales on credit during a certain accounting period.

Gross sales:

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Suppose the sale is made for cash…

Cash 1,000

Revenues from Sales 1,000

SalesSales

The entry?

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Suppose the sale is made on credit …

Accounts Receivable 1,000

Revenues from Sales 1,000

SalesSales

The entry?

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Sales returns and allowances reflect the dissatisfaction of customers, so a company should provide efficient control of the sales returns and

allowances.

Sales Returns and AllowancesSales Returns and Allowances

If the commodities are in damaged condition or unsatisfying, the seller may allow the customer to

return the item or give the customer an allowance off the sales price.

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Accounts Receivable (or Cash)

Sales Returns and Allowances 200

200

Sales Returns and AllowancesSales Returns and Allowances

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If the debit side

is sales account instead of sales returns and allowances?

Sales Returns and AllowancesSales Returns and Allowances

The entry can’t reveal the dissatisfaction of customers.

What about the entry?

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Trade Discount and Sales DiscountTrade Discount and Sales Discount

In order to get a big sale, a merchandising company usually quotes prices of goods at a discount (such as 20%, 30%) off the list

of catalogue price.

trade

disc

ount

.?

Trade discount?

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Suppose that the seller of an article listed at $2,000 with a trade discount of 25%...

The entry?

Cash 1,500

Revenues from Sales 1,500

Trade Discount and Sales DiscountTrade Discount and Sales Discount

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Trade Discount and Sales DiscountTrade Discount and Sales DiscountThe seller often provides discounts to the

customer in order to let the seller pay early. Such discount is called sales discount.

sales

disc

ount

.?

Sales discount?

Sales discount can increase the seller’s liquidity.

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“2/10, 1/20, n/30”

The customer may take a 2 percent discount if the debt is

paid within 10 days and 1 percent discount if the it is paid within 20

days.

The term of n/30 indicates that the customer must pay the full amount after 30 days without

discount.

Now, let’s look at an example of

sales discount.

Trade Discount and Sales DiscountTrade Discount and Sales Discount

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At the end of the accounting period, the Sales Discounts account has accumulated all the sales discounts taken during the accounting period.

Sales discounts are recorded only at the time the customer pays because the seller can’t know

whether the customer will take advantage of the discount by paying in the discount period.

Sales discounts are considered a contra revenue account since sales discounts reduce revenues

from sales.

Trade Discount and Sales DiscountTrade Discount and Sales Discount

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Assume that George Ross Advertisement

Company sells merchandise to a

customer on March 3rd for $400, on terms of 2/10,

n/30....

The entry?

Trade Discount and Sales DiscountTrade Discount and Sales Discount

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If the customer paid the amount on March 3nd

If the customer paid the amount on March 22nd

If the paid the full amount on April 2nd

Accounts Receivable 400 Revenues from Sales 400

Cash 320Sales Discount 80 Accounts Receivable 400

Cash 400 Accounts Receivable 400

Trade Discount and Sales DiscountTrade Discount and Sales Discount

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Purchases account?

Which items should be recorded in the purchases

account?

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Purchases account?

Inventory

Automobiles

Buildings

Machines

Raw material

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Purchases account?

Resale

Buying products or merchandise Purchases account

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Sales Returns and Allowances

Damaged

Unsatisfying

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Returns and Allowances

Returns

Allowances

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Purchase returns and allowances

Sales returns and allowances

Purchase returns

and allowances

Seller Buyer

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Purchase returns and allowances

Now, let’s look at an example for T.EN Fashions

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Purchase returns and allowances example

T.EN Fashions purchased a unit of sweaters for 4,000 dollars on credit from Bihai Costumes Company.

On the delivery date, T.EN found some of the commodities are wetted. Bihai took 20% off the total price as alternative to returning the goods for full credit.

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Purchase returns and allowances example

The journal The journal entries entries

Accounts Payable 800

Purchased Returns and Allowances 800

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Purchase Discount

In order to collect the payment earlier, the supplier sometimes gives some

discounts to the company. Such discounts are considered

purchase discounts.

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Purchase Discount

2/10 , n/30

within 10 days,

2% percent discount

30 days, deadline

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Purchase Discount

Now, let’s look at an example for Purchase

Discount

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Purchase discount example

Suppose a company purchased merchandise on credit for $3,000 on September 9th, on terms of

“2/10, 1/20, n/30”

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Purchase discount example

The Entry?

How much do they pay?

If the company pays the debt on September 29th

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Purchase discount example

The entry

Accounts Payable 3,000

Purchases Discounts 30

Cash 2,970

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Purchase discount example

If the amount is paid on the deadline

How much do they pay?

The Entry?

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Purchase discount example

The entry

Accounts Payable 3,000

Cash 3,000

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WE ARE SAILING RIGHT ALONG!!