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MGAB01H3 (127)
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Chapter 5.3

Chapter 5.3

2 Pages
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Department
Financial Accounting
Course Code
MGAB01H3
Professor
Liang Chen

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Chapter 5.3
Recording Sales of Merchandise
To comply with the revenue recognition principle, sales revenue is recorded when it is earned, just as
service revenue is. Two entries are made for each sale in a perpetual inventory system.
(1) DR cash or A/R, CR sales
(2) DR Costs of goods sold, CR Merchandise inventory.
Sales Taxes
Sales taxes are collected when goods are sold. They are not however a part of revenue. The company
simply acts as a tax agent collector for the government and must be periodically remitted to the
government.
Freight Costs
When the selling terms indicates FOB destination, the costs to transport the goods are debited to the
operating expense account Freight out or delivery expense.
Sales Returns and Allowances
When customers are given discount or return goods, the seller will return cash or credit to the
customer. Under perpetual system, there are two entries to record a sales returns and allowances.
(1) DR sales returns and allowances, CR cash or A/R
(2) DR Merchandise Inventory, CR Cost of goods sold
If the merchandise is not able to be resold, the second entry is not recorded. If the merchandise is not
returned, simply a discount is offered, and then the second entry is also not recorded.
Discounts
No separate entries are required for a quantity discount. Sales are recorded at the invoice price. A sales
discount, opposite of a purchase discount, requires an entry however. A sales discount is a contra
revenue account to the sales account.
Summary of Sales Transactions
To determine net sales, the following formula is used:
Gross sales t sales returns and allowance t sales discounts = net sales
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Description
Chapter 5.3 Recording Sales of Merchandise To comply with the revenue recognition principle, sales revenue is recorded when it is earned, just as service revenue is. Two entries are made for each sale in a perpetual inventory system. (1) DR cash or AR, CR sales (2) DR Costs of goods sold, CR Merchandise inventory. Sales Taxes Sales taxes are collected when goods are sold. They are not however a part of revenue. The company simply acts as a tax agent collector for the government and must be periodically remitted to the government. Freight Costs When the selling terms indicates FOB destination, the costs to transport the goods are debited to the operating expense account Freight out or delivery expense. Sales Returns and Allowances When customers are given discount or return goods, the seller will return cash or credit to
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