ACCOUNTING FOR SALES OF GOODS

Description of Account Titles to be used:

1. 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.
2. Sales Discount This refers to prompt payment discount given to customers (buyer) for
their early payment of accounts.
3. 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.
4. 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.

Account Accounting Normal Financial Section of

Valuation
Names Element Balance Statement FS
Sales Revenue Credit Income Revenue Selling Price
Statement From Sales (Acquisition cost
PLUS Profit)
Sales Discount Contra Debit Income Revenue Based on
Revenue Statement From Sales discount rate
(this is the approved by
basic suppliers
accounting
treatment)
Sales Returns Contra Debit Income Revenue Selling Price
Revenue Statement From sales (Acquisition cost
PLUS Profit)
Sales Contra Debit Income Revenue Selling Price
Allowances Revenue Statement From sales (Acquisition cost
PLUS Profit)
Freight-out Expense Debit Income Operating Cost of delivery,
Statement expenses including other
Distribution related
cost or expenses.
Selling
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 XXX
Less: Sales Discount XXX
Sales Returns XXX
Sales Allowances XXX XXX
Net Sales XXX

Recording Sales Transactions

1
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 50,000.00
Sales 50,000.00
Cash sales (SI No. 101)

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.

2
 Income Statement Presentation:

Sales 50,000.00
Less: Sales Returns 2,000.00
Net Sales 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 70,000.00
Sales 70,000.00
Cash sales (SI No. 101)

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 50,000.00
Less: Sales Allowances 1,000.00
Sales Returns 2,000.00 3,000.00
Net Sales 47,000.00

3
 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 SELLER, therefore, the focus is
on SALES DISCOUNT account title.

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 SALES (COMBINATION OF CASES)

Case 1:
On February 10, 2015, Gemini Company sold goods to Scorpio Corporation worth P
150,000.00. Terms: 5/20; 2/30. On February 11, 2015, a reduction of P 5,000.00 was given
by Gemini Corporation to Scorpio Corporation due to minor defects of some items delivered
to Scorpio Corporation.

Situation A: The account was collected in full within the twenty (20) days discount period.
Situation B: The account was collected in full within the thirty (30) days discount period.
Situation C: The account was collected beyond the discount period.

Case 2:
On March 5, 2015, Fortune Company sold merchandise to Lucky Corporation worth P
300,000.00. Terms: 3/10; 1/60. On the same date, Fortune Company paid P 5,000 to deliver
the goods to customer. On March 6, 2015, P 25,000.00 of merchandise was returned by
Lucky Corporation due to major defects of some items delivered.

Situation A: The account was collected in full within the ten (10) days discount period.
Situation B: The account collected in full within the sixty (60) days discount period.
Situation C: The account was collected beyond the discount period.

Case 3:
On February 20, 2015, Single Merchandising sold goods to Double Corporation worth P
200,000.00. Terms: 25% down payment; balance - 5/20; 2/30. On February 21, 2015, a
4
reduction of P 5,000.00 was granted by Single Merchandising to Double Corporation due to
minor defects of some items delivered.

Situation A: The account was collected in full within the twenty (20) days discount period.
Situation B: The account was collected in full within the thirty (30) days discount period.
Situation C: The account was collected beyond the discount period.

Case 4:
On March 15, 2015, Red Ribbon Company sold merchandise to Black Ribbon Corporation
worth P 400,000.00. Terms: 25% down payment; balance - 3/10; n/60. On the same date,
Red Ribbon Company paid P 8,000 to deliver the goods to customer. On March 16, 2015, P
10,000.00 of merchandise was returned by Black Ribbon Corporation due to major defects of
some items delivered. On March 20, 2015, a partial collection was received amounting to P
100,000.

Situation A: The account was collected in full within the ten (10) days discount period.
Situation B: The account was collected beyond the discount period.

Case 5:
On April 20, 2015, Fatherly Trading sold goods to Motherly Corporation worth P 300,000.00.
Terms: 25% down payment; balance - 5/20; n/30. Related delivery cost was P 10,000. On
April 21, 2015, a reduction of P 20,000.00 was given by Fatherly Trading due to minor
defects of some items delivered to Motherly Corporation. On April 30, 2015, a partial
collection was received amounting to P 150,000.

Situation A: The account was collected in full within the twenty (20) days discount period.
Situation B: The account was collected beyond the discount period.