ACCOUNTING FOR SALES
The Income Statement for a commercial company, including a merchandiser and a
manufacturer, has certain key items that one should expect to see. These include net
sales, cost of sales (or cost of goods sold), gross profit or margin, operating expenses
(that include selling, administrative, general expenses), operating income, as well as
income before income taxes, income taxes, and net income. It is important that you
recognize that this is a multi-step income statement—because there are subtotals for gross
profit, operating income and income before taxes as well as the net income total. While
every commercial company has these line items on the Income Statement, two things
must be noted.
The same line items may have slightly different names as we see for gross
profit versus gross margin, cost of sales versus cost of goods sold, etc.
A company may choose to expand a specific line item to show several
accounts or groups of accounts. One might show net sales only or one may
show gross sales less sales returns and discounts in arriving at net sales. A
company can decide to show this on the face of the income statement or in a
footnote; however, if certain amounts are not significant, they tend to be
added together and only one number shown as “net sales”. The same can be
true for the details of specific operating expenses, etc.
is made up of a number of different basic accounts and we want to address each
one in description as well as journal entry format so you clearly see how they work:
revenue whether from product or service has been discussed for several
chapters. The sales account is a
account in that it will always have a
credit balance and the entry to record the actual sale is a credit to a revenue
account, with a corresponding debit to cash or accounts receivable ( if it is a
credit sale). Remember that you rarely, if ever have a debit to a revenue
account unless some type of an error occurred or a return, etc. In fact, we can
now make it more restrictive and say that if you use the accounts we will
describe next, the only time sales revenue will have a debit entry is when an
error was made or at the end of the year when you close the account to Income
Summary or Retained Earnings in the closing process.
happens when the sale has already been completed and the
customer physically returns merchandise to the seller. When this occurs, the
company records a debit to sales returns and a credit to either cash or accounts
receivable depending on whether the initial sale was a cash or credit sale. The
sales return account is always a
balance and there should only be debit
entries to this account.