chapter 6 - Chapter 6 Reporting and Interpreting Sales...

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I) ACCOUNTING FOR SALES REVENUE a The Revenue Principle : requires that revenue be recorded when earned W HEN IS R EVENUE “E ARNED ?” - For Sellers of Goods : revenue is earned when the title and risks of ownership of a good are transferred to the buyer, the details of this transfer are explained in the shipping terms on the sales contract FOB Shipping Point : revenue is recognized at shipment Buyer usually pays for shipping FOB Destination : revenue is recognized at delivery Seller usually pays for shipping - For Service Companies : revenue recognized when service is rendered R EVENUE R ECOGNITION M ETHODS : a company’s method of revenue recognition is outlined in footnote “Summary of Significant Acc. Policies” T HE A MOUNT OF R EVENUE R ECOGNIZED : the cash equivalent sales price - Methods of Receiving Revenue: Allowing Customers to use Credit Cards Giving Business Customers Direct Credit option and Early Payment Discounts Allowing Customers to Return Goods Each method of receiving revenue affects the way the company computes Net Sales Revenue b Credit Card Sales to Customers : companies extend credit to customers b/c: - Increase Consumer Traffic - Avoid Cost to Provide Customers w/ Credit (recordkeeping, bad debt) - Gets Them Money Faster (Credit Card Receipts Direct Deposited) - Lowers Losses From Bad Checks - Lowers Losses from Fraudulent Credit Cards (verification etc) C REDIT C ARD D ISCOUNT : a fee charged by credit card companies for the services they perform which is recorded as an expense - Example : credit card sales were $3,000, 3% CC discount c Sales Discounts for Early Payment : many companies sell merchandise to other companies on open account (no formal promissory note or credit card) C REDIT T ERMS : usually printed on the sales invoice, often w/ abbreviations - N/30 : the full price is due within 30 days of the invoice date N = Sales Amount, Net of and Sales Returns 30 = How May Days the Customer has to Pay Their Bill S ALES D ISCOUNT : granted to the customer to encourage early payment - 2/10 : 2% will be deducted from invoice price if paid w/in 10 days Gross Sales Revenue $3,000 Less: Credit Card Discount (3,000 x .03) 90 Net Sales (Reported on Income Statement) $2,910
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2= % Discount 10= Period Which the Customer Can Receive the Discount B ENEFITS OF E ARLY P AYMENT TO S ELLER : - Prompt receipt of cash from customers reduces necessity to borrow $ - Customers tend to pay discounted bills first, decreasing the possibility that they will run out of cash before the bill is paid E XAMPLE : - - - If payment is made after the discount period, the full $1,000 would be reported on the income statement as Net Sales d : customers have right to return damaged merchandise S ALES R ETURNS LLOWANCES : separate account to record returned goods - Must be Deducted from Gross Sales Revenue to determine Net Sales
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chapter 6 - Chapter 6 Reporting and Interpreting Sales...

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