Lesson Objectives:- Sale transaction types
- Recording journal entries for sales and shipping costs.
- Journalizing sales returns and discounts.
In the previous lesson, we covered inventory purchase transactions that are recorded using the merchandise inventory account. The next type of account that will come up related to sales transactions in the perpetual inventory system is the cost of goods sold. The cost of goods sold, also referred to as COGS represents the expense for the amount of goods sold.
In this lesson we will be covering four different types of sales transactions including the sale of inventory, shipping costs, sales returns and discounts.
- Sale of Inventory: This is the most common sales transaction when the company sells merchandise to customers.
- Shipping Costs: Either the purchaser or seller pays a shipping carrier for product delivery.
- Sales Returns: Customers return merchandise for defects, issues or missing pieces.
- Discounts: The company offers discounts for bulk or advanced payment.
Let's say we are selling goods for $8,000 and offer a discount to the customer of 2 percent if they pay the balance within 10 days, otherwise they will pay the full price. This discount would be formatted as 2/10, n/30.
This transaction would be fairly simple as we are increasing the accounts receivable and since it is an asset, it will be debited for $8,000. The sales account is also increasing but would be a credit entry since it is on the equity side. The first journal entry above would represent the revenue that is generated from the sale.
The next journal entry would represent the expense related to the sale; the cost of goods sold would be debited and the merchandise inventory would be credited. The reason for the second entry is due to the matching principle that requires the revenue to be matched to the expenses incurred.
The second type of journal entry for sales has the same two types of FOB destination and FOB shipping that we talked about when reviewing purchase transactions. Although in this case, the company is the seller of the goods.
For FOB destination, the company is paying for shipping costs as the seller. They would need to record the freight out expense and cash paid for the shipping. If they paid $60 for shipping, the freight out would be debited and cash would be credited as shown in the journal entry above. In contrast, there will be no entry if the purchaser pays for the shipping with FOB shipping terms.
When the company has merchandise being returned, they will need to reduce their sales accounts. In order to record this type of transaction, we first need to debit sales returns and credit accounts receivable for the amount of the sale being returned.
The second entry would reflect the merchandise coming back to the inventory and the cost of goods sold. The merchandise inventory is an asset that is increasing so it would be debited and the cost of goods sold would be credited.
The final type of sales transaction that we will go over is discounts when the company offers a percentage or amount off for bulk or advanced purchases. First, we would record the sales transaction and cost of goods sold transaction assuming nothing was returned.
Next, we would record the journal entries for the discount. Since we are offering a 2 percent discount for cash payment within 10 days, we would record the receipt of cash as a debit for $7,840 and credit accounts receivable for the full price of $8,000.
For the contra sales account, we would need to record the sales discount as a debit of $160. The sales account is being reduced in this case because of the discount.
Now that you've learned how to record the different sales transactions, we will be reviewing how to prepare a multi-step income statement in the next lesson.