Sales Cycle and Revenue Recognition

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Questions and Answers

What journal entry is made to record a sales allowance of $200 due to defective merchandise?

Debit Sales Returns and Allowances $200 and credit Accounts Receivable $200.

How does a sales allowance affect the Cost of Goods Sold (COGS)?

A sales allowance has no impact on COGS as inventory is not returned to the seller.

What is the normal balance of a Sales Returns and Allowances account?

The normal balance of a Sales Returns and Allowances account is a debit.

Explain the journal entry for recognizing a sales discount of $20 on a $1,000 sale.

Debit Sales Discounts $20 and credit Accounts Receivable $20. Signup and view all the answers

What distinguishes cash sales from credit sales in terms of revenue recognition?

Cash sales are recognized immediately when cash is received, while credit sales are recognized when a sale is made, regardless of cash receipt. Signup and view all the answers

What are the implications of offering credit terms, such as 'n/30', to customers?

'n/30' indicates that the net amount is due within 30 days, encouraging prompt payment and increasing cash flow. Signup and view all the answers

Describe how sales returns and allowances can provide insights into the quality of merchandise.

Sales returns and allowances can highlight defective products and indicate quality control issues. Signup and view all the answers

What impact do sales discounts have on a company's gross sales?

Sales discounts reduce the gross sales figure reported on financial statements. Signup and view all the answers

What journal entry is made when Jay Corp records a cash sale of 100 units at $100 each on January 15th?

Dr. Cash $10,000; Cr. Sales $10,000 Signup and view all the answers

How is the journal entry for a credit sale different from a cash sale?

In a credit sale, the entry is Dr. Accounts Receivable $10,000; Cr. Sales $10,000. Signup and view all the answers

What does 'Sales Returns and Allowances' refer to in the sales process?

It refers to the reduction in sales revenue due to returned goods or price concessions. Signup and view all the answers

What happens in the journal entries when cash is received for a credit sale?

Dr. Cash $10,000; Cr. Accounts Receivable $10,000. Signup and view all the answers

Which account is debited when recording the sale of merchandise on credit?

Accounts Receivable is debited. Signup and view all the answers

What key difference separates cash sales from credit sales in terms of recording?

Cash sales immediately increase cash, while credit sales increase Accounts Receivable. Signup and view all the answers

When merchandise is sold and later returned, which account is typically credited?

Sales Returns and Allowances account is credited. Signup and view all the answers

In the T-account for cash sales, what is the total amount transferred to the Cash A/c in this case?

$10,000. Signup and view all the answers

What journal entries are recorded when Jay Corp receives cash of $10,000 from a customer?

Dr. Cash $10,000; Cr. Accounts Receivable $10,000. Signup and view all the answers

When should revenue be recognized according to the revenue recognition principle?

Revenue should be recognized when inventory leaves the company or at the time of sale. Signup and view all the answers

What are the journal entries for the sale of 100 units of product at $100 each when the goods are transferred?

Dr. Cash $10,000; Cr. Sales $10,000. Signup and view all the answers

How is the cost of goods sold recorded for 100 units purchased at $70 each?

Dr. Cost of Goods Sold $7,000; Cr. Inventory $7,000. Signup and view all the answers

What entries should be made when merchandise sold is returned by the buyer?

Dr. Sales Returns and Allowances $1,000; Cr. Accounts Receivable $1,000. Signup and view all the answers

What journal entries are needed to account for the return of 10 units at a cost of $70 each?

Dr. Inventory $700; Cr. Cost of Goods Sold $700. Signup and view all the answers

What are the differences between cash sales and credit sales in terms of journal entries?

Cash sales result in Dr. Cash and Cr. Sales; credit sales involve Dr. Accounts Receivable and Cr. Sales. Signup and view all the answers

How does recording sales returns affect inventory and cost of goods sold?

Sales returns increase inventory and decrease cost of goods sold. Signup and view all the answers

Study Notes

Sales Cycle

Includes recording merchandise sales and cost of goods sold.
Categorizes sales as cash sales and sales on credit.
Subcategories of credit sales include sales returns and allowances, and sales discounts.
Also includes freight.

Merchandise Sales - Revenue Recognition

Revenue is recognized when the sale is recorded.
The goods must be transferred to the buyer.
The amount of the sale must be measurable.
Payment must be reasonably assured.

Merchandise Sales - Example Transaction

Jay Corp sells 100 units for $100 each on January 10th.
Goods transferred on January 15th.
Payment received on January 15th.
Journal entry records the sale.
- Dr. Cash 10,000
- Cr. Sales 10,000
T account entries for cash sales:
- Dr. Cash A/c 10,000
- Cr. Sales A/c 10,000
T account entries for credit sales:
- Dr. Accounts Receivable A/c 10,000
- Cr. Sales A/c 10,000

Credit Sales - Cash Receipt

Jay Corp receives $10,000 from customer within 30 days.
Journal entry:
- Dr. Cash A/c 10,000
- Cr. Accounts Receivable A/c 10,000

Cost of Goods Sold

Satisfies the matching principle.
Recorded as an expense in the same period when merchandise is sold.
Journal entry:
- Dr. Cost of Goods Sold
- Cr. Inventory

Merchandise Sales - Further Example

Jay Corp purchased 100 units at $70 each.
Journal entry records the sale.
- Dr. Inventory 7,000
- Cr. Cost of Goods Sold 7,000

Accounting for Sales Returns

Merchandise is returned by buyer.
Increases merchandise inventory and decreases cost of goods sold.
Sales returns and allowances account is a contra-revenue account.
Carries a normal debit balance.
- Example: Buyer returns 10 units.
- Journal entry:
  - Dr. Sales Returns and Allowances 1,000
  - Cr. Accounts Receivable 1,000

Accounting for Sales Allowances

Merchandise is defective; seller offers a price reduction.
Reduces gross sales, and accounts receivable.
Sales Allowances account is a contra-revenue account.
- Example: 20 defective units at a $10 reduction each.
- Journal Entry:
  - Dr. Sales returns and allowances 200
  - Cr. Accounts receivable 200

Sales Discounts

Incentive for early payment by credit customers.
Contra revenue account linked to sales.
Reduces gross sales.
Example credit terms: n/30, 2/15.
- January 10th - Credit sale to customer.
- January 22nd - Customer pays.
- Cr. Sales discounts 20
- Dr. Cash 980
- Cr. A/R 1,000

Free On Board (FOB)

FOB Shipping Point: Ownership transfers when inventory leaves the vendor. Buyer takes responsibility for loss, insurance, and transportation.
FOB Destination Point: Ownership transfers when inventory reaches the customer. Seller responsible for loss, insurance, and transportation.

Freight Expenses

Freight in = cost of shipping inventory purchased (adds to cost of inventory purchases).
Freight out = cost of shipping inventory sold (adds to operating expenses).
Journal entry:
- Dr. Inventory
- Cr. Cash or Accounts Payable

Net Sales

Gross sales - sales returns and allowances - sales discounts = net sales

New Accounting Rules - Adjustments to Net Sales

Net sales adjusted at year-end for estimated sales discounts, returns, and allowances.

New Accounting Rules - Example

If net sales for 2021 was 500,000andestimated2022salesdiscounts,allowances,andreturnsrelatedto2021salesare500,000 and estimated 2022 sales discounts, allowances, and returns related to 2021 sales are 500,000andestimated2022salesdiscounts,allowances,andreturnsrelatedto2021salesare40,000; then 2021 reported net sales will be $460,000.

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Description

This quiz covers key concepts related to the sales cycle, including the categorization of cash and credit sales, and the recognition of revenue. You'll learn about journal entries and T account entries for different types of sales transactions. Test your understanding of merchandise sales and the steps involved in recognizing revenue for accounting purposes.