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ACCOUNTING FOR SALES OF GOODS

Description of Account Titles to be used:


1.
2.
3.
4.

Sales This refers to selling price of goods to customers (buyers). The selling price is the sum of the
acquisition cost of goods and the profit.
Sales Discount This refers to prompt payment discount given to customers (buyer) for their early
payment of accounts.
Sales Returns This refers to selling price of goods previously sold but returned by customers (buyers)
due to defects, wrong specifications, and other acceptable reasons.
Sales Allowances This refers to reduction in selling price of goods previously sold but discovered by
customers (buyers) that the items sold to them have defects but they have no intention to return such
goods to sellers.

Sales

Accounting
Element
Revenue

Sales Discount

Contra Revenue

Account Names

Normal
Balance
Credit

Financial
Statement
Income Statement

Debit

Income Statement

Section of FS
Revenue
From Sales
Revenue
From
Sales
(this is the
basic
accounting
treatment)

Sales Returns

Contra Revenue

Debit

Income Statement

Revenue
From sales

Sales Allowances

Contra Revenue

Debit

Income Statement

Revenue
From sales

Freight-out

Expense

Debit

Income Statement

Operating
expenses

Distribution
cost or Selling
Expenses

Valuation
Selling
Price
(Acquisition
cost
PLUS Profit)
Based on discount
rate approved by
suppliers

Selling
Price
(Acquisition
cost
PLUS Profit)
Selling
Price
(Acquisition
cost
PLUS Profit)
Cost of delivery,
including
other
related expenses.

Notes:
Contra Accounts are accounts deducted from balances of its mother account.

Income Statement Presentation


The Income Statement of a merchandising business is usually presented in multi-step form because it
consists of various steps to compute the net income. It also consists of different parts as follows:
1. Sales Section (This is also the Revenue From Sales section)
2. Cost of Sales Section
3. Gross Profit From Sales Section
4. Other Income
5. Total Income
6. Operating Expenses Section
a. Distribution cost (selling expenses)
b. Administrative costs (general and administrative expenses)
c. Finance costs
d. Other costs
7. Net Profit (Net Loss) Section

Revenue from Sales Section of the Income Statement:

Sales
Less: Sales Discount
Sales Returns
Sales Allowances
Net Sales

XXX
XXX
XXX
XXX
XXX

XXX

Recording Sales Transactions


Sales of goods to customers (buyers)can either be on a cash basis or on account basis.
In recording sales of goods to customers (buyers), revenues of the business increase by the SELLING
PRICE (ACQUISITION COST PLUS PROFIT) of such goods being sold. This is regardless whether
revenues are collected or not. This principle is in accordance with the ACCRUAL BASIS of accounting
which states that revenues shall be recognized in the accounting books as long as these goods are already
delivered to customers. In contrast, if advance collections are made prior to delivery of goods, NO
REVENUES shall be recognized in the accounting books of the seller, instead a LIBILITY ACCOUNT
shall be set-up like UNEARNED SERVICE REVENUE or any appropriate account.
In the case of sale of business assets which are not classified as merchandise or goods for sale, the SALES
ACCOUNT is not used or credited. Instead, the asset account is credited. Any difference between the
selling price and the cost or carrying value of the asset sold is called as either GAIN OR LOSS FROM
SALE OF SUCH ASSET.
To simplify the above discussion, upon sale of goods or merchandise by the seller, the REVENUE of the
company increases. Therefore, the account name SALES is credited.
To illustrate the two cases of sales of goods or merchandise, see example below:
Case 1: Cash sales to Monopoly Trading, PhP 100,000.00 (Sales Invoice No. 101).
The accounting journal entry should be:
Cash
1,000,000.00
Sales
1,000,000.00
Cash Sales (SI No. 101).
Case 2:

Sold merchandise on account basis to Domination Trading, PhP 150,000.00 (Sales Invoice 105).

The accounting journal entry should be:


Accounts Receivable Domination Trading
150,000.00
Sales
150,000.00
Sales on account (SI No. 105).

Accounting for Sales Returns (Basic Problem)


In trading business, returns of goods by customers (buyers) are always possible. This may be due to major
defects discovered on the sold items that cannot be repaired at all. This may also be due to wrong
specifications. In actual practice, there are other possible reasons for the return of goods sold by suppliers.
If goods will be returned by customers (BUYERS), the REVENUES of the business will decrease. The
amount of the decrease is equivalent to SELLING PRICE (ACQUISITION COST PLUS PROFIT) of items

to be returned.
To illustrate, see example below:
June 1
- Cash sales to XYZ Trading, PhP 50,000.00 (Sales Invoice 101).
June 2
- Returned PhP 2,000.00 worth of goods sold by XYZ Trading.
Accounting Journal Entries:
June 1
- Cash
Sales
Cash sales (SI No. 101)

50,000.00
50,000.00

Notes: If the sold goods were on account basis, the

debit should be Accounts

Receivable.
June 2

- Sales Returns
2,000.00
Cash
2,000.00
Return of goods by XYZ Trading due to damage.
Notes:

If the sold goods were on account basis, the

credit should be

Accounts Receivable.

Income Statement Presentation:

Sales

50,000.00
Less: Sales Returns

Net Sales

2,000.00
48,000.00

SALES RETURNS as Contra Account (Contra Revenue) to Sales account.


PhP 48,000.00 is known as NET SALES (Sales Sales Returns Returns)

Accounting for Sales Allowance (Basic Problem)


In trading business, like Sales Returns, deduction in selling price is also possible due to minor defects
discovered on the sold items. This may also be due to wrong specifications. In actual practice, there are
other possible reasons for sales allowances.
If goods will be not be returned by customers (buyers) but reduction in selling prices will be allowed by
suppliers (SELLER), the REVENUES of the business will decrease. The amount of decrease is equivalent
to approved reduction in selling price by the authorized personnel of the Seller.
To illustrate, see example below:
Case 1:
June 1
- Cash Sales to ABC Trading, PhP 70,000.00 (Sales Invoice 101).
June 2
- Returned PhP 10,000.00 worth of goods by customers.
June 3
- Sales allowance of PhP 1,000.00 was granted by ABC Trading due to minor defects of some
items.
Accounting Journal Entries:
June 1 - Cash
Sales
Cash sales (SI No. 101)

70,000.00
70,000.00

Notes:
If the sale of goods was on account basis, the

debit should be Accounts

Receivable.
June 2

- Sales Returns
10,000.00
Cash
10,000.00
Return of goods by ABC Trading due to damage.
Notes:
If the sale of goods was on account basis, the

credit should be Accounts

Receivable.
June 3

- Sales Allowances
1,000.00
Cash
1,000.00
Reduction in selling price to ABC Trading due to minor damage.
Notes:
If the sale of goods was on account basis, the

credit should be Accounts

Receivable.
Income Statement Presentation:

Sales
Less: Sales Allowances
Sales Returns
Net Sales

50,000.00
1,000.00
2,000.00
3,000.00
47,000.00

SALES ALLOWANCES as Contra Account (Contra Revenue) to Sales account.


PhP 47,000.00 is known as NET SALES (Sales Sales Returns - Sales
Allowances)

Accounting for Sales Discount (Basic Problem)


In trading business, prompt payment discounts are usually given to customers (BUYERS) by SELLERS at
different rates because the terms may also vary from one transaction to another. Loyalty of customers is
also considered. In accounting, prompt payment discount received by customers (BUYER) is recorded in
the point of view of the BUYER as PURCHASE DISCOUNT, and on the point of view of the SELLER
as SALES DISCOUNT.
For the meantime, our attention is on the point of view of the
SALES DISCOUNT account title.

SELLER, therefore, the focus is on

If Sales Discounts are given to buyers, the SELLERS Revenue decreases by the amount of the discount.

To Illustrate, let us use the following cases:

Case 1:
On January 1, 2010, Bronze Trading sold merchandise to Silver Trading amounting to PhP 200,000.00.
Terms: 2/10; n/60.
Situation A: The account was collected within the discount period.
Situation B: The account was collected beyond the discount period.
Case 2:
On January 1, 2010, Mountain Marketing sold goods to Boondock Trading amounting to PhP 100,000.00.
Terms: 2/15; 1/30.
Situation A: The account was collected in full within the fifteen (15) days discount period.
Situation B: The account was collected in full within the thirty (30) days discount period.
Situation C: PhP 40,000.00 was collected within the ten (10) days discount period, the balance within the
thirty (30) days discount period.

ACCOUNTING FOR PURCHASES OF GOODS


Description of Account Titles to be used:
5.
6.
7.
8.

Purchases This refers to acquisition cost of goods purchased from suppliers.


Purchase Discount This refers to prompt payment discount given by suppliers for early payment of
accounts.
Purchase Returns This refers to acquisition cost of goods previously purchased but returned to
suppliers due to defects, wrong specifications, and other acceptable reasons.
Purchase Allowances This refers to reduction in acquisition cost of goods previously purchased and
discovered with defects but not returned to suppliers.

Purchases

Accounting
Element
Expense

Normal
Balance
Debit

Financial
Statement
Income Statement

Purchase Discount

Contra Expense

Credit

Income Statement

Purchase Returns

Contra Expense

Credit

Income Statement

Purchase
Allowances
Freight - in

Contra Expense

Credit

Income Statement

Adjunct Expense

Debit

Income Statement

Account Names

Section of
FS
Cost of
Sales
Cost of
Sales
Cost of
Sales
Cost of
Sales
Cost of
sales

Valuation
Acquisition cost
Based on discount rate
approved by suppliers
Acquisition cost
Based on amount
approved by suppliers
Delivery cost amount,
including other related
costs; also called
inward transportation
or transportation-in

Notes:
Contra Accounts are accounts deducted from balances of its mother account.

Income Statement Presentation


The Income Statement of a merchandising business is usually presented in multi-step form because it
consists of various steps to compute the net income. It also consists of different parts as follows:
8.

Sales Section

9.
10.
11.
12.
13.

Cost of Sales Section


Gross Profit From Sales Section
Operating Income
Operating expenses
Net Profit (Net Loss) Section

Cost of Sales Section of the Income Statement:


Merchandise Inventory, beginning of the year
Add: Purchases
Less: Purchase Discount

Purchase Returns
Purchase Allowances
Net Purchases
Add: Freight in
Cost of goods available for sale
Less: Merchandise Inventory, end of the year
Cost of Sales

XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX

Recording Purchases Transactions


Acquisition of goods from suppliers can either be on a cash basis or on account basis.
In recording acquisition of goods from suppliers, expenses of the business increase by the acquisition cost
of such goods being purchased. In contrast, such goods are not yet expenses upon acquisition because this
items are intended for sale which only means that the buyer will benefit from these goods in the future by
selling it. In the end, the benefit is the PROFIT.
Remember when we say EXPENSES, there is no future benefit at all to be derived from such item. In short,
the company already receives its benefit that is why it is considered as expense. On the other hand, as long
as there is benefit to be received in the future, it is considered as an ASSET.
In the case of acquisition of goods with the intention to sell, we usually record these goods based on
acquisition cost as an EXPENSE that is why we will use the account name PURCHASES. It is based on
the assumption that these goods will be sold in the future. In short, it will still become part of expenses.
To simplify the above discussion, upon acquisition of goods or merchandise intended to be sold in the
trading business, the EXPENSE of the company increases. Therefore, the account name PURCHASES is
debited.
To illustrate the two cases of acquisition, see example below:
Case 1: Cash Purchases from ABC Trading, PhP 70,000.00 (Sales Invoice 101).
The accounting journal entry should be:
Purchases
70,000.00
Cash
70,000.00
Cash Purchases (SI No. 101).
Case 2:

Purchase merchandise on account basis from XCEL Trading, PhP 50,000.00 (Sales Invoice 105).

The accounting journal entry should be:

Purchases
50,000.00
Accounts Payable XCEL Company
Purchases on account (SI No. 102).

50,000.00

Accounting for Purchase Returns (Basic Problem)


In trading business, returns of goods to suppliers are always possible. This may be due to major defects
discovered for the purchased items that cannot be repaired at all. This may also be due to wrong
specifications. In actual practice, there are other possible reasons for return of goods purchased to suppliers.
If goods will be returned to suppliers (SELLER), the EXPENSES of the business who bought (BUYER)
such goods will decrease. The amount of the decrease is equivalent to cost of items to be returned.
To illustrate, see example below:
June 1
- Cash Purchases from ABC Trading, PhP 70,000.00 (Sales Invoice 101).
June 2
- Returned PhP 10,000.00 worth of goods purchased from ABC Trading.
Accounting Journal Entries:
June 1
- Purchases
Cash
Cash Purchases (SI No. 101)

70,000.00
70,000.00

Notes: If the acquired goods were on account basis, the

credit should be

Accounts Payable.
June 2

- Cash

10,000.00

Purchase Returns

10,000.00

Return of goods to ABC Trading due to damage.


Notes:

If the acquired goods was on account basis, the

debit should be

Accounts Payable.

Income Statement Presentation:


Merchandise Inventory, beginning of year
Add: Purchases

Less: Purchase Returns


Cost of goods available for sale
Less: Merchandise Inventory, end of year
Cost of Sales

XXXXXX

70,000.00
10,000.00 60,000.00
XXXXXX
XXXXXX
XXXXXX

PURCHASE RETURNS as Contra Account (Contra Expense) to Purchases account.

PhP 60,000.00 is known as NET PURCHASES (Purchases Purchase Returns)

Accounting for Purchase Allowance (Basic Problem)


In trading business, like Purchase Returns, returns, deduction in acquisition cost is also possible due to
minor defects discovered for the purchased items. This may also be due to wrong specifications. In actual
practice, there are other possible reasons for purchase allowances.
If goods will be not be returned to suppliers but reduction in cost will be allowed by suppliers (SELLER),
the EXPENSES of the business who bought such goods (BUYER) will decrease. The amount of decrease is
equivalent to approved reduction in price by the authorized personnel of the Seller.

To illustrate, see example below:


Case 1:
June 1
- Cash Purchases from ABC Trading, PhP 70,000.00 (Sales Invoice 101).
June 2
- Returned PhP 10,000.00 worth of goods purchased from ABC Trading.
June 3
- Purchase allowance of PhP 1,000.00 was granted by ABC Trading due to minor defects of
some items.
Accounting Journal Entries:
June 1 - Purchases
Cash
Cash Purchases (SI No. 101)

70,000.00
70,000.00

Notes:
If the acquired goods was on account basis, the

credit should be

Accounts Payable.
June 2

- Cash
10,000.00
Purchase Returns
10,000.00
Return of goods to ABC Trading due to damage.
Notes:
If the acquired goods was on account basis, the

debit should be

Accounts Payable.
June 3

- Cash
1,000.00
Purchase Allowances
1,000.00
Reduction in cost by ABC Trading due to minor damage.
Notes:
If the acquired goods was on account basis, the

Accounts Payable.

Income Statement Presentation:


Merchandise Inventory, beginning of year
Add: Purchases

XXXXXX
70,000.00

debit should be

Less: Purchase Returns

10,000.00

Purchase Allowances
Cost of goods available for sale
Less: Merchandise Inventory, end of year
Cost of Sales

1,000.00 11,000.00 59,000.00


XXXXXX
XXXXXX
XXXXXX

PURCHASE ALLOWANCES as Contra Account (Contra Expense) to Purchases account.

PhP 59,000.00 is known as NET PURCHASES (Purchases Purchase Returns Purchase


Allowances)

Accounting for Purchase Discount (Basic Problem)


In trading business, prompt payment discounts are usually given to customers (BUYERS) by SELLERS at
different rates because the terms may also vary from one transaction to another. Loyalty of customers is
also considered. In accounting, prompt payment discount received by customers (BUYER) is recorded in
the point of voew of the BUYER as PURCHASE DISCOUNT, and on the point of view of the SELLER as
SALES DISCOUNT.
For the meantime, our attention is on the point of view of the BUYER, therefore, the focus is on
PURCHASE DISCOUNT account title.
If Purchase Discounts are received by buyers, his EXPENSES decrease by the amount of the discount.
Prompt payment discounts are expressed as follows:
(a) 2/10 This means that 2% discount will be given by the SELLER to the BUYER if the account
will be paid within ten (10) days period after acquisition date by the buyer.
(b) 5/10; 2/30 This means that 5% discount will be given by the SELLER to the BUYER if the
account will be paid in full within ten days after acquisition date. Otherwise, only 2% discount
will be given if paid beyond ten (10) days but not later than thirty (30) days after acquisition date
by the buyer.
(c) 2/10; n/30 This means that 2% discount will be given by the SELLER to the BUYER if the
account will be paid in full within ten (10) days period after acquisition date. Otherwise, discount
will not be given to buyer but the account should be paid in full not later than thirty (30) days after
acquisition date.
To Illustrate, let us use the following cases:
Case 1:
On January 1, 2010, Silver Trading purchased merchandise from Bronze Trading amounting to PhP
200,000.00. Terms: 2/10; n/60.
Situation A: The account was paid within the discount period.
Situation B: The account was paid beyond the discount period.
Case 2:
On January 1, 2010, Boondock Marketing purchased goods from Mountain Trading amounting to PhP
100,000.00. Terms: 2/15; 1/30.
Situation A: The account was paid in full within the ten (10) days discount period.
Situation B: The account was paid in full within the thirty (30) days discount period.

Situation C: PhP 40,000.00 was paid within the ten (10) days discount period, the balance within the thirty
(30) days discount period.