CBS purchases 80 units of the 4-in-1 desktop printers at a costof $100 each on July 1 on credit. Terms of the purchase are 5/15,n/40, with an invoice date of July 1. On July 6, CBS discovers 15of the printers are damaged and returns them to the manufacturerfor a full refund.
Because of all the new income statement-related accounts that were introduced for the merchandising concern, it is helpful to revisit the closing process. Recall the objective of closing; to transfer the net income to retained earnings and to reset the income statement accounts to zero in preparation for the next accounting period. As a result, all income statement accounts with a credit balance must be debited and vice versa. Several items are highlighted in these journal entries and are discussed further in the next paragraph.
Let’s continue to follow California Business Solutions (CBS) and the sale of electronic hardware packages to business customers. As previously stated, each package contains a desktop computer, tablet computer, landline telephone, and 4-in-1 printer. They offer their customers the option of purchasing extra individual hardware items for every electronic hardware package purchase. The following is the list of products CBS sells to customers; the prices are per-package, and per unit.
On June 8, CBS discovers that 60 more phones from the June 1purchase are slightly damaged. CBS decides to keep the phones butreceives a purchase allowance from the manufacturer of $8 perphone. Merchandise Inventory-Packages increases (debit) for 6,200 ($620× 10), and Cash decreases (credit) because the company paid withcash. It is important to distinguish each inventory item type tobetter track inventory needs.
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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). Unlike in the perpetual inventory system, CBS does not recognize accounting tips and guides for beginners the return of merchandise to inventory. Instead, CBS will make an adjustment to Merchandise Inventory at the end of the period. In business, we usually can purchase the merchandise on account from the suppliers that we have a close business relationship with.
On June 1, CBS purchased 300 landline telephones with cash at acost of $60 each. On June 3, CBS discovers that 25 of the phonesare the wrong color and returns the phones to the manufacturer fora full refund. The following entries occur with the purchase andsubsequent https://www.bookkeeping-reviews.com/accounts-receivable-subsidiary-ledger-definition/ return. On May 1, CBS purchases 67 tablet computers at a cost of $60each on credit. The payment terms are 5/10, n/30, and the invoiceis dated May 1. We debit the $5,000 to the purchases account in this journal entry because we use the periodic inventory system.
CBS purchases 80 units of the 4-in-1 desktop printers at a cost of $100 each on July 1 on credit. Terms of the purchase are 5/15, n/40, with an invoice date of July 1. On July 6, CBS discovers 15 of the printers are damaged and returns them to the manufacturer for a full refund. The following entries show the purchase and subsequent return. On April 1, CBS purchases 10 electronic hardware packages at acost of $620 each. This journal entry will eliminate the $5,000 of accounts payable that we have recorded on January 1 for the purchase of merchandise inventory on account.
What expense category is clothing bought for employees?
This procedure helps to verify that all the postings have been made correctly. Finally, at the end of the month, a list of the individual subsidiary accounts is created. This list is often called the accounts payable trial balance (or a schedule of accounts payable). Importantly, storage costs, insurance, interest and other similar costs are considered to be period costs that are not attached to the product. Instead, those ongoing costs are simply expensed in the period incurred as operating expenses of the business. Take a moment and look at the invoice presented earlier in this chapter for Barber Shop Supply.
- In addition, it is important to update the inventory records.
- On April 17, CBS makes full payment on the amount due from theApril 7 purchase.
- But a merchandising company’s income statement includes categories that service enterprises do not use.
- Since CBS already paid in full for their purchase, a cash refundof the allowance is issued in the amount of $480 (60 × $8).
- The discount cannot be taken during the “yellow shaded” days (of which there are twenty).
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. Accounts Receivable increases (debit) and Sales increases (credit) by $16,800 ($300 × 56). These credit terms are a little different than the earlier example. This means that the customer has 10 days from the invoice date to pay on their account to receive a 2% discount on their purchase.
Summary of Sales Transaction Journal Entries
What is important to note here is that skipping past the discount period will only achieve a twenty-day deferral of the payment. Consider that a 2% return is “earned” by paying 20 days early. There are approximately 18 twenty-day periods in a year (365/20), and, at 2% per twenty-day period, this equates to over a 36% annual interest rate equivalent. The customer has not yet paid for their purchase as of October 6.
For example, on January 1, we make a $5,000 purchase of merchandise on account from one of our suppliers. Later, on February 1, we make the $5,000 cash payment for this credit purchase to our supplier to clear the debt on our balance sheet. This is because there are two inventory systems including the periodic inventory system and the perpetual inventory system.
On July 7, CBS sells 20 desktop computers to a customer on credit. On the other hand, if we use the perpetual inventory system, we need to directly add the purchased amount of the merchandise goods to the merchandise inventory immediately. This is due to, under the perpetual inventory system, the inventory balance needs to be updated perpetually (e.g. every time there is an inventory in or inventory out). This is because the clothing is being used to promote the business, and so it is directly related to the business’s marketing efforts. If the clothing being purchased is for employees to wear as part of their job (e.g. uniforms), then it would typically be classified as a cost of goods sold.
