Inventory is defined as the merchandise that a company holds for sale to customers. After a company buys inventory, the next step is to sell the goods. We shift now to the selling side and follow Smart Touch through a sequence of selling transactions. The amount a business earns from selling merchandise inventory is called Sales revenue (Sales). At the time of the sale, two entries must be recorded in the perpetual system: One entry records the sale and the cash (or receivable) at the time of the sale.
The second entry records Cost of goods sold (debit the expense) and reduces the Inventory (credit the asset). Cost of goods sold (COGS) is the cost of inventory that has been sold to customers. Cost of goods sold (also known as Cost of sales or COS) is the merchandisers major expense. After making a sale on account, Smart Touch may experience any of the following:
A sales return: The customer may return goods to Smart Touch, asking for a refund or credit to the customers account.
A sales allowance: Smart Touch may grant a sales allowance to entice the customer to accept non-standard goods. This allowance will reduce the future cash collected from the customer.
A sales discount: If the customer pays within the discount periodunder terms such as 2/10, n/30Smart Touch collects the discounted amount.
Freight out: Smart Touch may have to pay delivery expense to transport the goods to the buyer.
Purchase returns and allowances and purchase discounts decrease the cost of inventory purchases. In the same way, sales returns and allowances and sales discounts decrease the net amount of revenue earned on sales. Sales returns and allowances and Sales discounts are contra accounts to Sales revenue. Recall that a contra account has the opposite normal balance of its companion account. So, Sales returns and allowances and Sales discounts both are contra revenue accounts and have normal debit balances. Companies maintain separate accounts for Sales discounts and Sales returns and allowances so they can track these items separately. Net sales revenue is calculated as Net sales revenue = Sales revenue Sales returns and allowances Sales discounts. Net sales revenue, cost of goods sold and gross profit are key elements of profitability.
Net sales revenue minus Cost of goods sold is called Gross profit, or Gross margin. You can also think of gross profit as the mark-up on the inventory. All sales transactions are between the company and a customer. In a perpetual system, each sales transaction has two entries. The first entry records the sales price to the customer (debit Cash or Accounts receivable and credit Sales revenue). The second entry updates the Inventory account (debit COGS and credit Inventory). When customers return goods, two entries are made. The first entry records the returned goods from the customer at their sales price (debit Sales returns and allowances and credit Cash or Accounts receivable). The second entry updates the Inventory account (debit Inventory and credit COGS). When customers pay early to take advantage of terms offered, it reduces the amount of cash the company receives and a Sales discount is recorded.
The second entry records Cost of goods sold (debit the expense) and reduces the Inventory (credit the asset). Cost of goods sold (COGS) is the cost of inventory that has been sold to customers. Cost of goods sold (also known as Cost of sales or COS) is the merchandisers major expense. After making a sale on account, Smart Touch may experience any of the following:
A sales return: The customer may return goods to Smart Touch, asking for a refund or credit to the customers account.
A sales allowance: Smart Touch may grant a sales allowance to entice the customer to accept non-standard goods. This allowance will reduce the future cash collected from the customer.
A sales discount: If the customer pays within the discount periodunder terms such as 2/10, n/30Smart Touch collects the discounted amount.
Freight out: Smart Touch may have to pay delivery expense to transport the goods to the buyer.
Purchase returns and allowances and purchase discounts decrease the cost of inventory purchases. In the same way, sales returns and allowances and sales discounts decrease the net amount of revenue earned on sales. Sales returns and allowances and Sales discounts are contra accounts to Sales revenue. Recall that a contra account has the opposite normal balance of its companion account. So, Sales returns and allowances and Sales discounts both are contra revenue accounts and have normal debit balances. Companies maintain separate accounts for Sales discounts and Sales returns and allowances so they can track these items separately. Net sales revenue is calculated as Net sales revenue = Sales revenue Sales returns and allowances Sales discounts. Net sales revenue, cost of goods sold and gross profit are key elements of profitability.
Net sales revenue minus Cost of goods sold is called Gross profit, or Gross margin. You can also think of gross profit as the mark-up on the inventory. All sales transactions are between the company and a customer. In a perpetual system, each sales transaction has two entries. The first entry records the sales price to the customer (debit Cash or Accounts receivable and credit Sales revenue). The second entry updates the Inventory account (debit COGS and credit Inventory). When customers return goods, two entries are made. The first entry records the returned goods from the customer at their sales price (debit Sales returns and allowances and credit Cash or Accounts receivable). The second entry updates the Inventory account (debit Inventory and credit COGS). When customers pay early to take advantage of terms offered, it reduces the amount of cash the company receives and a Sales discount is recorded.
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