Sales Cycle PDF

Sales Cycle Recording Merchandise Sales and Cost of Goods sold Cash sales and Sales on credit terms Sales Returns and Allowances Sales Discounts Freight 1 Merchandise Sales – Revenue Recognition Goods have Amount of Sale i...

Sales Cycle Recording Merchandise Sales and Cost of Goods sold Cash sales and Sales on credit terms Sales Returns and Allowances Sales Discounts Freight 1 Merchandise Sales – Revenue Recognition Goods have Amount of Sale is Payment is been sale can be recorded reasonably transferred measured, when assured to buyer, and 2 Merchandise Sales – Revenue Recognition Jay Corp sells 100 units of product for $100 each on January 10th. The goods were transferred on January 15th and the payment is received. JOURNAL ENTRY TO RECORD THE SALE TRANSACTION Jan 15th Dr. Cash 10,000 Cr. Sales 10,000 (to record cash sales) 3 T Account entries to record cash sales Dr. Cash A/c 10,000 Cr. Sales A/c 10,000 Cash A/c Sales A/c Dr. Cr. Dr. Cr. Sales A/c $10,000 Cash A/c $10,000 Jay Corp sells 100 units of product for $100 each on January 10th. The goods were transferred on January 15th and the payment is received. 4 T Account entries to record credit sales Dr. Accounts Receivable A/c 10,000 Cr. Sales A/c 10,000 Accounts Receivable A/c Sales A/c Dr. Cr. Dr. Cr. Sales A/c $10,000 Accounts $10,000 Receivable A/c Jay Corp sells 100 units of product for $100 each on January 10th. The goods were transferred on January 15th and the customer promised to pay the amount in 30 days. 5  Credit Sales – Cash receipt Dr. Cash A/c 10,000 Cr. Accounts Receivable A/c 10,000 Accounts Cash A/c Receivable (A/R) Dr. Cr. Dr. A/c Cr. A/R a/c $10,000 Cash a/c $10,000 Jay Corp receives cash of $10,000 from customer within 30 days 6  Cost of Goods Sold Satisfies Matching Principle Recorded as an expense in the same period when merchandise is sold Dr. Cost of Goods Sold Cr. Inventory (to record journal entry for cost of goods sold) 7  Merchandise Sales – Revenue Recognition Timing – when inventory leaves the company – typically same as timing of sale Jay Corp sells 100 units of product for $100 each on January 10th. The goods were transferred on January 15th and the payment is received. Jay Corp purchased the 100 units of product from the vendor at a cost of $70 each. JOURNAL ENTRIES TO RECORD THE SALE TRANSACTION Jan 15th Dr. Cash 10,000 Cr. Sales 10,000 (to record cash sales) Jan 15th Dr. Cost of Goods Sold 7,000 Cr. Inventory 7,000 (to record cost of inventory) 8  Accounting for Sales Returns Jay Corp sells on credit 100 units of product for $100 each on Merchandise sold is returned January 10th. Jay Corp purchased the 100 units of product from by buyer the vendor at a cost of $70 each on December 8th. Buyer returns 10 units Sales Return Increases Merchandise Dr. Sales returns and allowances $1,000 inventory and decreases Cr. Accounts Receivable $1,000 cost of goods sold Dr. Inventory $700 Sales returns and allowances Cr. Cost of Goods Sold $700 account is a contra revenue account linked to the sales account – carries a normal debit balance 9  Accounting for Sales Allowances Merchandise sold is Jay Corp sells on credit 100 units of product for $100 each on defective and seller offers January 15th. Jay Corp purchased the 100 units of product from the a reduction in price vendor at a cost of $70. Of the units sold, 20 units are found to be defective Sales Allowance and the buyer agrees to keep the defective units in exchange for a price reduction of $10 each. Reduces gross sales and Dr. Sales Returns and Allowances 200 accounts receivable – a contra revenue account Cr. Accounts receivable 200 No impact on inventory or cost of Review of Sales Returns and Allowances –shows goods sold, because inventory is not quality of merchandise and efficiency of operations returned by customer 10  Sales Discounts Incentive to Contra Credit terms credit revenue - expressed Reduces customers account as n/number gross sales for early linked to of days payment sales allowed Jay Corp sells on Buyer pays on Jan 22. credit 100 units of The buyer pays $980 product for $100 after deducting the each on January 10th $20 discount allowed The credit terms are Dr. Cash 980 n/30, 2/15 Dr. Sales discounts 20 Cr. A/R 1,000 11  Free On Board (FOB) FOB (free on board) destination – ownership changes FOB (free on board) hands and revenue is shipping point – recognized at the ownership changes Shipping Terms point of delivery to hands and revenue is the customer recognized when goods leave the shipping dock FOB Shipping Point – ownership transfers when inventory leaves vendor or seller – risk of loss, insurance cost, transportation cost – all the buyer – think of yourself picking up a TV from a store in your truck. FOB Destination Point – ownership transfers when inventory reaches the customer or buyer – risk of loss during transit, insurance cost and transportation costs – all the seller or vendor – think of yourself purchasing the TV and having the TV delivered. 12  Freight expenses Freight expense = cost of shipping merchandise inventory “Freight in” = shipping cost “Freight out” = shipping of inventory purchased cost of inventory sold Adds to cost of inventory Adds to Operating purchases expenses Dr. Inventory Dr. Freight out Cr. Cash or Accounts Payable Cr. Cash 13 Net Sales Gross Sales - Sales returns and allowances - Sales discounts = Net Sales 14  New Accounting rules – adjustments to net sales Net sales should be adjusted further at year end starting 2021 Reduced further on account of “estimated” sales discounts, returns and allowances This is in addition to accounting for already occurred sales returns, allowances and discounts during the year. Results in a very conservative and relatively accurate number for sales and estimated cash collections from sales. 15 New accounting rules - Example For example, if net sales for 2021 is $500,000 (net of all discounts, allowances and returns), and if the Company were to estimate that additional sales discounts, allowances and returns that they anticipate in 2022, relating to sales of products that happened in 2021, to be $40,000. Net sales to be reported on the Income Statement for fiscal year 2021 will be $500,000-$40,000 = $460,000 Note that Gross sales is reduced by both actual returns, allowances and discounts, as well as estimated returns, allowances and discounts. The actual adjusting entries for this adjustment are relatively complex and beyond the scope of this course. 16