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Principles of Accounting, Volume 1: Financial Accounting

6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System

Principles of Accounting, Volume 1: Financial Accounting6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
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  1. Preface
  2. 1 Role of Accounting in Society
    1. Why It Matters
    2. 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
    3. 1.2 Identify Users of Accounting Information and How They Apply Information
    4. 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
    5. 1.4 Explain Why Accounting Is Important to Business Stakeholders
    6. 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
  3. 2 Introduction to Financial Statements
    1. Why It Matters
    2. 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate
    3. 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses
    4. 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Analyzing and Recording Transactions
    1. Why It Matters
    2. 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
    3. 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
    4. 3.3 Define and Describe the Initial Steps in the Accounting Cycle
    5. 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
    6. 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
    7. 3.6 Prepare a Trial Balance
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  5. 4 The Adjustment Process
    1. Why It Matters
    2. 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries
    3. 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries
    4. 4.3 Record and Post the Common Types of Adjusting Entries
    5. 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance
    6. 4.5 Prepare Financial Statements Using the Adjusted Trial Balance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  6. 5 Completing the Accounting Cycle
    1. Why It Matters
    2. 5.1 Describe and Prepare Closing Entries for a Business
    3. 5.2 Prepare a Post-Closing Trial Balance
    4. 5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity
    5. 5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  7. 6 Merchandising Transactions
    1. Why It Matters
    2. 6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
    3. 6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
    4. 6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
    5. 6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
    6. 6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
    7. 6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
    8. 6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  8. 7 Accounting Information Systems
    1. Why It Matters
    2. 7.1 Define and Describe the Components of an Accounting Information System
    3. 7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
    4. 7.3 Analyze and Journalize Transactions Using Special Journals
    5. 7.4 Prepare a Subsidiary Ledger
    6. 7.5 Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Fraud, Internal Controls, and Cash
    1. Why It Matters
    2. 8.1 Analyze Fraud in the Accounting Workplace
    3. 8.2 Define and Explain Internal Controls and Their Purpose within an Organization
    4. 8.3 Describe Internal Controls within an Organization
    5. 8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
    6. 8.5 Discuss Management Responsibilities for Maintaining Internal Controls within an Organization
    7. 8.6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
    8. 8.7 Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  10. 9 Accounting for Receivables
    1. Why It Matters
    2. 9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions
    3. 9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
    4. 9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
    5. 9.4 Discuss the Role of Accounting for Receivables in Earnings Management
    6. 9.5 Apply Revenue Recognition Principles to Long-Term Projects
    7. 9.6 Explain How Notes Receivable and Accounts Receivable Differ
    8. 9.7 Appendix: Comprehensive Example of Bad Debt Estimation
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  11. 10 Inventory
    1. Why It Matters
    2. 10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions
    3. 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method
    4. 10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method
    5. 10.4 Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
    6. 10.5 Examine the Efficiency of Inventory Management Using Financial Ratios
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  12. 11 Long-Term Assets
    1. Why It Matters
    2. 11.1 Distinguish between Tangible and Intangible Assets
    3. 11.2 Analyze and Classify Capitalized Costs versus Expenses
    4. 11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs
    5. 11.4 Describe Accounting for Intangible Assets and Record Related Transactions
    6. 11.5 Describe Some Special Issues in Accounting for Long-Term Assets
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Current Liabilities
    1. Why It Matters
    2. 12.1 Identify and Describe Current Liabilities
    3. 12.2 Analyze, Journalize, and Report Current Liabilities
    4. 12.3 Define and Apply Accounting Treatment for Contingent Liabilities
    5. 12.4 Prepare Journal Entries to Record Short-Term Notes Payable
    6. 12.5 Record Transactions Incurred in Preparing Payroll
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  14. 13 Long-Term Liabilities
    1. Why It Matters
    2. 13.1 Explain the Pricing of Long-Term Liabilities
    3. 13.2 Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method
    4. 13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds
    5. 13.4 Appendix: Special Topics Related to Long-Term Liabilities
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  15. 14 Corporation Accounting
    1. Why It Matters
    2. 14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock
    3. 14.2 Analyze and Record Transactions for the Issuance and Repurchase of Stock
    4. 14.3 Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits
    5. 14.4 Compare and Contrast Owners’ Equity versus Retained Earnings
    6. 14.5 Discuss the Applicability of Earnings per Share as a Method to Measure Performance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  16. 15 Partnership Accounting
    1. Why It Matters
    2. 15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
    3. 15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
    4. 15.3 Compute and Allocate Partners’ Share of Income and Loss
    5. 15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
    6. 15.5 Discuss and Record Entries for the Dissolution of a Partnership
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  17. 16 Statement of Cash Flows
    1. Why It Matters
    2. 16.1 Explain the Purpose of the Statement of Cash Flows
    3. 16.2 Differentiate between Operating, Investing, and Financing Activities
    4. 16.3 Prepare the Statement of Cash Flows Using the Indirect Method
    5. 16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method
    6. 16.5 Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency
    7. 16.6 Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  18. Financial Statement Analysis
  19. Time Value of Money
  20. Suggested Resources
  21. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
  22. Index

The following example transactions and subsequent journal entries for merchandise sales are recognized using a perpetual inventory system. The periodic inventory system recognition of these example transactions and corresponding journal entries are shown in Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System.

Basic Analysis of Sales Transaction Journal Entries

Let’s continue to follow California Business Solutions (CBS) and their sales of electronic hardware packages to business customers. As previously stated, each package contains a desktop computer, tablet computer, landline telephone, and a 4-in-1 printer. CBS sells each hardware package for $1,200. They offer their customers the option of purchasing extra individual hardware items for every electronic hardware package purchase. Figure 6.11 lists the products CBS sells to customers; the prices are per-package, and per unit.

List of products, sales prices, and cost to CBS, respectively: Electronic Hardware Package, $1,200, $620; Desktop Computer, $750, $400; Tablet Computer, $300, $60; Landline Telephone, $150, $60; and 4-in-1 Printer, $350, $100.
Figure 6.11 CBS’s Product Line. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Cash and Credit Sales Transaction Journal Entries

On July 1, CBS sells 10 electronic hardware packages to a customer at a sales price of $1,200 each. The customer pays immediately with cash. The following entries occur.

A journal entry shows a debit to Cash for $12,000 and credit to Sales for $12,000, followed by a debit to Cost of Goods Sold for $6,200 and credit to Merchandise Inventory: Packages for $6,200 with the note “to recognize cost of sale, 10 packages.”

In the first entry, Cash increases (debit) and Sales increases (credit) for the selling price of the packages, $12,000 ($1,200 × 10). In the second entry, the cost of the sale is recognized. COGS increases (debit) and Merchandise Inventory-Packages decreases (credit) for the cost of the packages, $6,200 ($620 × 10).

On July 7, CBS sells 20 desktop computers to a customer on credit. The credit terms are n/15 with an invoice date of July 7. The following entries occur.

A journal entry shows a debit to Accounts Receivable for $15,000 and credit to Sales for $15,000 with the note “to recognize sale of 20 desktop computers, n / 15,” followed by a debit to Cost of Goods Sold for $8,000 and credit to Merchandise Inventory: Desktop Computers for $8,000 with the note “to recognize cost of sale, 20 desktop computers.”

Since the computers were purchased on credit by the customer, Accounts Receivable increases (debit) and Sales increases (credit) for the selling price of the computers, $15,000 ($750 × 20). In the second entry, Merchandise Inventory-Desktop Computers decreases (credit), and COGS increases (debit) for the cost of the computers, $8,000 ($400 × 20).

On July 17, the customer makes full payment on the amount due from the July 7 sale. The following entry occurs.

A journal entry shows a debit to Cash for $15,000 and credit to Accounts Receivable for $15,000 with the note “to recognize payment in full.”

Accounts Receivable decreases (credit) and Cash increases (debit) for the full amount owed. The credit terms were n/15, which is net due in 15 days. No discount was offered with this transaction; thus the full payment of $15,000 occurs.

Sales Discount Transaction Journal Entries

On August 1, a customer purchases 56 tablet computers on credit. The payment terms are 2/10, n/30, and the invoice is dated August 1. The following entries occur.

A journal entry shows a debit to Accounts Receivable for $16,800 and credit to Sales for $16,800, followed by a debit to Cost of Goods Sold for $3,360 and credit to Merchandise Inventory: Tablet Computers for $3,360 with the note “to recognize cost of sale, 56 tablet computers.”

In the first entry, both Accounts Receivable (debit) and Sales (credit) increase by $16,800 ($300 × 56). These credit terms are a little different than the earlier example. These credit terms include a discount opportunity (2/10), meaning the customer has 10 days from the invoice date to pay on their account to receive a 2% discount on their purchase. In the second entry, COGS increases (debit) and Merchandise Inventory–Tablet Computers decreases (credit) in the amount of $3,360 (56 × $60).

On August 10, the customer pays their account in full. The following entry occurs.

A journal entry shows debits to Cash for $16,464 and to Sales Discounts for $336 and a credit to Accounts Receivable for $16,800 with the note “to recognize payment, less sales discount.”

Since the customer paid on August 10, they made the 10-day window and received a discount of 2%. Cash increases (debit) for the amount paid to CBS, less the discount. Sales Discounts increases (debit) for the amount of the discount ($16,800 × 2%), and Accounts Receivable decreases (credit) for the original amount owed, before discount. Sales Discounts will reduce Sales at the end of the period to produce net sales.

Let’s take the same example sale with the same credit terms, but now assume the customer paid their account on August 25. The following entry occurs.

A journal entry shows a debit to Cash for $16,800 and credit to Accounts Receivable for $16,800 with the note “to recognize payment for tablets, no discount.”

Cash increases (debit) and Accounts Receivable decreases (credit) by $16,800. The customer paid on their account outside of the discount window but within the total allotted timeframe for payment. The customer does not receive a discount in this case but does pay in full and on time.

Your Turn

Recording a Retailer’s Sales Transactions

Record the journal entries for the following sales transactions by a retailer.

Jan. 5 Sold $2,450 of merchandise on credit (cost of $1,000), with terms 2/10, n/30, and invoice dated January 5.
Jan. 9 The customer returned $500 worth of slightly damaged merchandise to the retailer and received a full refund. The retailer returned the merchandise to its inventory at a cost of $130.
Jan. 14 Account paid in full.

Solution

A journal entry for January 5 shows a debit to Accounts Receivable for $2,450 and credit to Sales for $2,450 with the note “to recognize sale on credit, 2 / 10, n / 30,” followed by a debit to Cost of Goods Sold for $1,000 and credit to Merchandise Inventory for $1,000 with the note “to recognize cost of sale” also on January 5, followed by January 9 entries of a debit to Sales Returns and Allowances for $500 and credit to Accounts Receivable for $500 with the note “to recognize customer return” and a debit to Merchandise Inventory for $130 and credit to Cost of Goods Sold for $130 with the note “to recognize merchandise return to inventory,” followed by an entry on January 14 of debits to Cash for $1,911 and Sales Discounts for $39 and a credit to Accounts Receivable for $1,950 with the note “to recognize payment, less discount and return.”

Sales Returns and Allowances Transaction Journal Entries

On September 1, CBS sold 250 landline telephones to a customer who paid with cash. On September 3, the customer discovers that 40 of the phones are the wrong color and returns the phones to CBS in exchange for a full refund. CBS determines that the returned merchandise can be resold and returns the merchandise to inventory at its original cost. The following entries occur for the sale and subsequent return.

A journal entry shows a debit to Cash for $37,500 and credit to Sales for $37,500 with the note “to recognize sale of 250 phones with cash,” followed by a debit to Cost of Goods Sold for $12,000 and credit to Merchandise Inventory: Phones for $15,000 with the note “to recognize cost of sale, 250 phones.”

In the first entry on September 1, Cash increases (debit) and Sales increases (credit) by $37,500 (250 × $150), the sales price of the phones. In the second entry, COGS increases (debit), and Merchandise Inventory-Phones decreases (credit) by $15,000 (250 × $60), the cost of the sale.

A journal entry shows a debit to Sales Returns and Allowances for $6,000 and credit to Cash for $6,000 with the note “to recognize return of 40 phones, cash refund,” followed by a debit to Merchandise Inventory: Phones for $2,400 and credit to Cost of Goods Sold for $2,400 with the note “to return merchandise to inventory, sellable condition.”

Since the customer already paid in full for their purchase, a full cash refund is issued on September 3. This increases Sales Returns and Allowances (debit) and decreases Cash (credit) by $6,000 (40 × $150). The second entry on September 3 returns the phones back to inventory for CBS because they have determined the merchandise is in sellable condition at its original cost. Merchandise Inventory–Phones increases (debit) and COGS decreases (credit) by $2,400 (40 × $60).

On September 8, the customer discovers that 20 more phones from the September 1 purchase are slightly damaged. The customer decides to keep the phones but receives a sales allowance from CBS of $10 per phone. The following entry occurs for the allowance.

A journal entry shows a debit to Sales Returns and Allowances for $200 and credit to Cash for $200 with the note “to recognize allowance for 20 phones.”

Since the customer already paid in full for their purchase, a cash refund of the allowance is issued in the amount of $200 (20 × $10). This increases (debit) Sales Returns and Allowances and decreases (credit) Cash. CBS does not have to consider the condition of the merchandise or return it to their inventory because the customer keeps the merchandise.

A customer purchases 55 units of the 4-in-1 desktop printers on October 1 on credit. Terms of the sale are 10/15, n/40, with an invoice date of October 1. On October 6, the customer returned 10 of the printers to CBS for a full refund. CBS returns the printers to their inventory at the original cost. The following entries show the sale and subsequent return.

A journal entry shows a debit to Accounts Receivable for $19,250 and credit to Sales for $19,250 with the note “to recognize sale of 55 printers on credit, 10 / 15, n / 40,” followed by a debit to Cost of Goods Sold for $5,500 and credit to Merchandise Inventory: Printers for $5,500 with the note “to recognize cost of sale, 55 printers.”

In the first entry on October 1, Accounts Receivable increases (debit) and Sales increases (credit) by $19,250 (55 × $350), the sales price of the printers. Accounts Receivable is used instead of Cash because the customer purchased on credit. In the second entry, COGS increases (debit) and Merchandise Inventory–Printers decreases (credit) by $5,500 (55 × $100), the cost of the sale.

A journal entry shows a debit to Sales Returns and Allowances for $3,500 and credit to Accounts Receivable for $3,500 with the note “to recognize return of 10 printers,” followed by a debit to Merchandise Inventory: Printers for $1,000 and credit to Cost of Goods Sold for $1,000 with the note “to return merchandise to inventory, sellable condition.”

The customer has not yet paid for their purchase as of October 6. Therefore, the return increases Sales Returns and Allowances (debit) and decreases Accounts Receivable (credit) by $3,500 (10 × $350). The second entry on October 6 returns the printers back to inventory for CBS because they have determined the merchandise is in sellable condition at its original cost. Merchandise Inventory–Printers increases (debit) and COGS decreases (credit) by $1,000 (10 × $100).

On October 10, the customer discovers that 5 printers from the October 1 purchase are slightly damaged, but decides to keep them, and CBS issues an allowance of $60 per printer. The following entry recognizes the allowance.

A journal entry shows a debit to Sales Return and Allowances for $300 and credit to Accounts Receivable for $300 with the note “to recognize allowance for 5 printers.”

Sales Returns and Allowances increases (debit) and Accounts Receivable decreases (credit) by $300 (5 × $60). A reduction to Accounts Receivable occurs because the customer has yet to pay their account on October 10. CBS does not have to consider the condition of the merchandise or return it to their inventory because the customer keeps the merchandise.

On October 15, the customer pays their account in full, less sales returns and allowances. The following payment entry occurs.

A journal entry shows debits to Cash for $13,905 and to Sales Discounts for $1,545 and credit to Accounts Receivable for $15,450 with the note “to recognize payment, less sales discount, return and allowance.”

Accounts Receivable decreases (credit) for the original amount owed, less the return of $3,500 and the allowance of $300 ($19,250 – $3,500 – $300). Since the customer paid on October 15, they made the 15-day window, thus receiving a discount of 10%. Sales Discounts increases (debit) for the discount amount ($15,450 × 10%). Cash increases (debit) for the amount owed to CBS, less the discount.

Summary of Sales Transaction Journal Entries

The chart in Figure 6.12 represents the journal entry requirements based on various merchandising sales transactions.

Journal entries starting with Sales Transaction Journal Entries at the top, followed by Sale, Customer Payment, and Sales Returns and Allowances on the second tier, then Cash, Credit, Received Discount, Did not Receive Discount, Sales Returns, and Sales Allowances on the third tier, and Entry 1: Dr. Cash, Cr. Sales, Entry 2: Dr. Cost of Goods Sold, Cr. Merchandise Inventory; Entry 1: Dr. Accounts Receivable, Cr. Sales, Entry 2: Dr. Cost of Goods Sold, Cr. Merchandise Inventory; Dr. Cash and Sales Discounts, Cr. Accounts Receivable; Dr. Cash, Cr. Accounts Receivable; Entry 1: Dr. Sales Returns and Allowances, Cr. Cash or Accounts Receivable, Entry 2: Dr. Merchandise Inventory, Cr. Cost of Goods Sold; and Dr. Sales Returns and Allowances, Cr. Cash or Accounts Receivable on the bottom tier.
Figure 6.12 Journal Entry Requirements for Merchandise Sales Transaction. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Your Turn

Recording a Retailer’s Sales Transactions

Record the journal entries for the following sales transactions of a retailer.

May 10 Sold $8,600 of merchandise on credit (cost of $2,650), with terms 5/10, n/30, and invoice dated May 10.
May 13 The customer returned $1,250 worth of slightly damaged merchandise to the retailer and received a full refund. The retailer returned the merchandise to its inventory at a cost of $380.
May 15 The customer discovered some merchandise were the wrong color and received an allowance from the retailer of $230.
May 20 The customer paid the account in full, less the return and allowance.

Solution

A journal entry for May 10 shows a debit to Accounts Receivable for $8,600 and credit to Sales for $8,600 with the note “to recognize sale on credit, 5 / 10, n / 30,” followed by a debit to Cost of Goods Sold for $2,650 and credit to Merchandise Inventory for $2,650 with the note “to recognize cost of sale” also on May 10, followed by May 13 entries of a debit to Sales Returns and Allowances for $1,250 and credit to Accounts Receivable for $1,250 with the note “to recognize customer return” and a debit to Merchandise Inventory for $380 and credit to Cost of Goods Sold for $380 with the note “to recognize merchandise return to inventory,” followed by an entry on May 15 of a debit to Sales Returns and Allowance for $230 and a credit to Accounts Receivable for $230 with the note “to recognize customer allowance,” followed by the May 20 entry of debits to Cash for $6,764 and Sales Discounts for $356 and a credit to Accounts Receivable for $7,120 with the note “to recognize payment, less discount, allowance and return.”
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