It helps solidify a long-term relationship with the customer, encourages the customer to purchase more, and decreases the time it takes for the company to see a liquid asset (cash). Cash can be used for other purposes immediately, such as reinvesting the business, paying down loans quicker, and distributing dividends to shareholders.
A sales return occurs when a customer returns merchandise for a full refund. A sales allowance occurs when a customer keeps the merchandise and is issued a partial refund.
Advantages could include real-time data and more robust information. Disadvantages could include fewer inventory counts with opportunity for mismanagement of inventory. It is also costly, and time consuming.
|Oct 18||Accounts Receivable||130|
|To recognize sale under periodic inventory system|
|Note: No cost of sale entry is required currently, only at the end of the period under periodic.|
Cash would be remitted to a retainer if the retailer returns merchandise to a manufacturer after payment, or if the retailer receives an allowance for damaged merchandise after payment.
$110; $1,100 × 50% = $550, $550 × 20% = $110
$6.15; $205 × 3%
With FOB Destination, the seller is responsible for goods in transit, the seller pays for shipping, and the point of transfer is when the goods reach the buyer’s place of business. With FOB Shipping Point, the buyer is responsible for goods in transit, the buyer pays for shipping, and the point of transfer is when the goods leave the seller’s place of business.
|To recognize sale on credit, 2/10, n/30, FOB Destination|
|To recognize cost of sale|
|To recognize shipping charge, FOB Destination|
32% or $.32; ($176,750 – 120,470) / $176,750
The gross profit margin ratio shows the company’s margin over costs of sales to cover operating expenses and profit. If margin continue to increase over time, an investor or lender might consider the financial contribution less risky. If the ratio decreases, the stakeholder may perceive an increased risk that the company may not have enough revenue to service debt.
$14.70; $490 × 3%
Recognizing the return of merchandise to inventory occurs under the perpetual inventory system but not under the periodic inventory system.