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Sales Transactions for Merchandise Business | Accounting How To | How to Pass Accounting Class
Oct 4, 2022
Sales Transactions for Merchandising Business | Accounting How To is an accounting tutorial explaining sales transactions in a merchandising business, sales terms like net 30 and 1%/10, net 30, sales discounts, and sales returns.
This is an accounting tutorial for accounting students, business owners, and bookkeepers to explain accounting basics for beginners. Featuring Terrance the T-Account Rex and accounting educator, Caroline Grimm, this accounting tutorial is part of two playlist series: How to Pass Accounting Class and Merchandise Businesses and Inventory Cost Methods.
⏰ Accounting How To Time Stamps:
00:00 Emotional Support Dinosaur (ESD) Warning
00:24 Introduction to Purchase and Sales Transactions
00:57 Introduction to Terms
02:16 Assume Discounts Are Always Taken?
03:32 Basic Sales Transaction
04:15 Adding New Details to Sales Transactions
05:14 Sales Transactions Example
06:35 Sales Transaction with Discount
08:25 Sales Return
10:57 Next Steps & Free Homework Helper
🏋 Download the spreadsheet here: https://docs.google.com/spreadsheets/d/13Zu6nCLZYZQS1YvzFLSy4TLBzWzk1ezz2_16mvXg_1A/edit?usp=sharing
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0:00
Hi, it's my emotional support dinosaur
0:05
I really need him for this video. Welcome to Accounting How To
0:09
I'm your host, Carolyn Grimm, and that's my sidekick, Terrence. We are here usually to put the fun in fundamentals of accounting
0:18
but today, maybe not so fun. But we'll get through it. So what we want to do today is we want to carry on with our merchandise business
0:27
And we want to look at sales transactions and how to track those sales transactions for accounting class
0:36
Now this is a companion video to the purchases transactions video, where you see the purchase transactions that go along with actually buying our merchandise before we can sell it
0:47
So for the purposes of the transactions that we're going to use in this video
0:51
we are going to assume that our business is using perpetual inventory
0:56
Now, one thing we need to understand for both our sales transactions and our purchases transactions
1:03
is terms. And we offer terms to our customers and our vendors offer terms to us
1:09
We need to understand what that means. So if you see terms that say net 30, it means that that bill has to be paid within 30 days
1:20
and it has to be paid in full within 30 days. If terms are 1% 10, net 30, that tells us that if we pay within 10 days, we can take 1% off
1:33
our bill. Or if our customers pay us within 10 days, they can take 1% off of our bill
1:40
If we don't pay within 10 days, then the whole amount is due within 30 days
1:47
So if we don't pay by, it says 2% 15 and net 45
1:52
it means that if we pay our bill or our customer pays us within 15 days
1:57
they can take a 2% discount. And net 45 means that the whole of it is due
2:02
within 45 days if we don't take the discount. And that encourages the company or a customer
2:08
to pay early to save some money. It helps the company by reducing costs
2:13
and it speeds up cashflow. So this is the part where I feel like I need my emotional support dinosaur to get through this
2:22
So textbooks have started saying, assume all discounts will be taken. And it has us adjust the cost of purchases or sales transactions based on that assumption
2:35
So for example, if you sell something to your customer for $100 and your terms are 2% 10
2:42
we are going to assume that your customer is going to take the discount
2:47
and we're only going to record the amount that we would be getting after the discount We do some examples so you see that better So this is not the way that we do things in real life So in real life we would enter the full amount
3:01
of the bill or the full amount of the sale, and then we would take or grant the discount
3:06
at the time when money changes hands. We wouldn't be assuming that the discount's
3:12
going to be taken or granted. So this is one of those examples of we need to do things
3:17
a certain way in accounting class and then forget about them when we get out
3:21
into the real world, which of course is kind of frustrating to me as a practicing accountant
3:26
I would live in the state of despair, but the rent is too high. But let's look at some sales transactions
3:32
Now, we've done sales transactions before, and the basic transaction doesn't change
3:36
Since this is perpetual inventory, every transaction will have both a sales part
3:41
and a cost of goods part, and the basic entry is accounts receivable
3:46
or cash if our customer's paying in cash. And the credit side is going to be sales
3:53
to increase our revenue account. The second part of that transaction will be on the inventory cost of goods side
4:00
and it will be cost of goods sold or cost of merchandise sold
4:04
whichever account that company's using. And the credit side will be merchandise inventory
4:09
As we're taking it out of our inventory, we're moving it into our expense, our cost of goods
4:15
So now we need to add a little detail to our accounts receivable
4:20
So accounts receivable is the summary account of all of the customers who owe us money
4:26
And the balance in accounts receivable is made up of lots of sub accounts
4:31
one for each of our customers. Now before we just used accounts receivable
4:36
in our journal entries, but we're getting much better at accounting now
4:41
And we wanna add some details So we know which customer owes us money
4:46
In real life, we would be creating invoices for our customers under that customer's name directly
4:53
But for the purposes of accounting class, we tack on a name in our journal entry line
4:59
So we're going to say accounts receivable dash Funasorco. And then our credit side is going to be sales
5:06
And then, of course, we would do our cost of merchandise sold and merchandise inventory piece of that entry as well
5:13
Now, let's do a sample transaction using Funasaur. Now, Funasaur, as you know, is a very popular dinosaur petting zoo
5:24
And they sell Terrence stuffies in their gift shop. They also sell prosthetic arms
5:31
I'm sorry, was that too dark? Okay. Okay, so Funnasaur orders from us 100 cases of Terrance stuffies, totaling $1,000. The cost of
5:45
the merchandise is and our terms are 2 10 net 30 So if Funasor pays us within 10 days they gonna get a 2 discount
5:58
So if we ignore that discount for a moment, our entry to record that transaction would be
6:04
a debit to accounts receivable dash Funasor for $1,000, sales credit for $1,000
6:14
Our cost of merchandise sold, a debit for $400, and merchandise inventory, a credit for $400
6:22
Then when our customer paid that bill, we would debit cash for $1,000
6:27
and we would credit accounts receivable Funasor for $1,000 to zero out their account
6:35
But because our textbook got weird on us, we need to bring those terms
6:40
into the way that we figure this transaction. So we're going to debit accounts receivable Funasor not for $1,000
6:48
but for $980. And this is our 2% discount on that $1,000
6:55
So $1,000 times 2% is $20. We're going to subtract that from our $1,000
7:03
And we're going to record our sales of 980. Our cost of merchandise sold, $400
7:09
Merchandise inventory, $400. that does not change. Then when Funasor pays the bill within terms
7:18
we're going to get $980 in cash, so we're debiting cash, and we're going to decrease our accounts receivable
7:25
for Funasor for $980 to show that they have paid that amount of money
7:31
But if our customer didn't make the payment within the discount period, and they paid us the full amount
7:38
the $1,000 that they owe us, we've got to do something different with this entry
7:44
So we're going to record the thousand dollars that we're receiving. We're debiting cash for a thousand dollars
7:50
We need to clear out the amount that's owed by Funasor in our accounts
7:54
receivable. So we're going to credit that for $980. That is the amount that we recorded for the sale in accounts receivable
8:04
But now we've got a difference of $20. So where does that $20 go
8:09
Well, now we're going to add that onto our sales account. So we're going to credit sales
8:15
So now overall for that sale, we have $1,000 in revenue because we've added on that extra $20
8:22
for the discount that they did not take. But let's add a wrinkle to that
8:27
Why not? Let's say the customer returns $100 worth of merchandise before they pay their bill
8:35
We're going to assume that the merchandise is undamaged and it can go right back out on the shelf
8:40
The cost of that merchandise that was returned was So let look at that entry So now what we need to do is we need to reduce our sales So we going to debit our sales account our revenue by to decrease it And we want to decrease
8:58
our accounts receivable by that amount for Funasor because they no longer owe us that amount. And
9:03
we're going to put this merchandise back into our inventory. So we are debiting merchandise inventory
9:08
and the expense related to that sale is now going to be decreased
9:13
because we have the merchandise back. Oh, but wait, we already booked the discount
9:19
on the entire amount. Now what do we do, Carolyn? Tell us
9:24
Well, we need to decrease our sales, not by $100, but by $98
9:30
which is the $100 minus the 2%. And we need to decrease our accounts receivable
9:37
by only that $98 because that's what we booked originally. The merchandise inventory and cost of merchandise sold
9:44
stays the same. And then if our customer pays us within terms
9:49
everything that they owe us, which is $980 minus $98, they're going to pay us $882
9:57
So we will increase our cash by that amount and we will decrease our accounts receivable
10:03
for Funasor by that amount. But what if they don't pay within terms, you ask
10:10
If they do not pay within terms, they're going to owe us the full amount
10:14
So it's going to be $1,000 minus the $100 that they returned
10:20
So we would be getting $900 in cash, debit to cash. We would be reducing our accounts receivable for Funasor by $882
10:29
which is the 980 minus the 98, the two discounted amounts for $882
10:37
And we now need to increase sales by the amount of the discount that they did not take
10:43
So $20 was the discount on the original amount and $2 was the discount on the amount that they returned
10:50
So $20 minus $2 gives us $18 more in sales revenue. And where does that leave us
10:58
crying under our desk, clutching our emotional support dinosaur. That's where it leaves us
11:05
But here's the good news. So I've done a sample homework problem for you and you can download it
11:11
and go through it step by step and use it as a guide for helping you to understand the accounting
11:17
homework. And then once we get through accounting classes, we can completely blank out that we ever
11:25
had this experience. Okay? Is it a deal? So you'll find the link to the spreadsheet in the description
11:32
for the video, and I think it's going to help to clear things up as you go through your accounting
11:37
homework with that as your guide. So until next time, stay balanced, my friends
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