Lecture 6 0208

Lecture 6 0208 - ORIE 350 Lecture#6 February 8 2007...

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    ORIE 350 Lecture #6 February 8, 2007
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    Discounts To encourage early payment, many companies offer special terms on accounts receivable. One example is 1%/10, net 30 This means that the customer can take a 1% discount if they pay within 10 days of receipt of the invoice, or must pay the full amount within 30 days. That is, if a company buys an item for $1000 with 1%/10 terms, and pays in two days, the company only has to pay $990
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    Discounts 2%/10, net 30 used to be common practice, but now that interest rates are so low in the USA, 1%/10 is usually the best you can get. But, the question is, how do we record the sales discount. After all, the company records an accounts receivable when the item is shipped or invoiced. The company records the full amount, since we do not know whether or not the customer will take the discount!
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    Discounts Say we sell a machine for $5,000, terms 1%/ 10 , net 30, on May 27, 2005. 5/27/05 Accounts Receivable 5,000 Sales Revenue 5,000
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    Discounts The customer sends us a check for $4,950 on June 2. The customer obviously took the discount. How do we record this? 6/2/05 Cash $4,950 Sales Discount 50 Accounts Receivable 5,000
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    Discounts The Sales Discount is a contra-revenue (XR) account. It is included with the other revenue accounts, but it has a debit balance! So it is like anti-revenue.
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    Returns and Allowances Customers (like my wife) return purchased goods all of the time. It turns out to be the wrong size, etc.
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Lecture 6 0208 - ORIE 350 Lecture#6 February 8 2007...

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