Chapter 6 Study Notes - Selling a Product or Service

Chapter 6 Study Notes - Selling a Product or Service -...

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1 CHAPTER 7 SELLING A PRODUCT OR A SERVICE (Revenue Recognition) 3 major types of businesses— 1) service (e.g. accounting. consulting or law firm), 2) manufacturing (e.g. auto manufacturer) & 3) merchandising (e.g. department or grocery store) Each type of business has some unique revenue recognition issues, but generally for manufacturing & merchandising, revenue is recognized when goods are shipped or title changes; for service businesses, when the project is completed. 3 Post-Sale Events that Would Reduce Revenue Already Recorded 1. Offer discount if pay early—do not know if customer will take advantage of discount until payment received. Need to relieve A/R for original amount of sale recorded, but receive lesser amount of cash. Difference is recorded in Sales Discounts account— contra revenue account —will appear in income statement as a reduction of Sales Revenue. 2. Give price adjustment ( allowance) to dissatisfied customer— Need to relieve A/R for original amount of sale recorded, but receive a lesser amount of cash. Difference is recorded in account— contra revenue account —will appear in income statement as a reduction of Sales Revenue. 3. Goods are returned from customer ( sales returns) —Need to relieve A/R since will not be paid & record ; Also reverse cost of goods sold & restore inventory. --Use contra revenue accounts rather than reduce Sales Revenue directly to provide information re. products, managers, policies so can make better decisions in future. ACCOUNTS RECEIVABLE— current asset; amount that customer/client owes the company for goods or services provided; normally expected to be paid within 30 days. Very common in business to business sales or provision of services to sell or provide services “on account”—bill the customer/client and expect payment in near future. Depending on type of business, may also be common for sales/services to individual
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Chapter 6 Study Notes - Selling a Product or Service -...

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