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RECEIVABLES, AND CASH 1. APPLYING THE REVENUE PRINCIPLE TO RECORD SALES A. Revenue Recognition Principle 1. Revenues are reported when they are earned . 2. An exchange has taken place, the earnings process is complete or nearly complete, and collection is probable . 3. Merchandising companies normally records sales revenue when goods are transferred to the buyer. 4. Service companies usually recognize revenue when services are performed . 5. Revenue recognition rules used by a company should be disclosed in the Notes , and should be applied consistently. B. Shipping terms (When are goods “transferred” to buyer?) 2. FOB Destination – the title changes hands on delivery, and the seller normally pays for shipping. 3. FOB Shipping Point – the title changes hands at the shipping point, and the buyer normally pays for shipping. 4. ANALYZING THE IMPACT OF SALES, SALES DISCOUNTS, AND SALES RETURNS ON THE AMOUNTS REPORTED AS NET SALES. A. Sales Discounts to Businesses 1. Credit sales represent a less formal agreement than a note. 2. The credit period indicates when the invoice amount is due Example: “ n/30 ” – net amount is due in 30 days. 3. Sales discount (cash discount) is an incentive to encourage early payment of open account charges. Early payment must be made within the discount period. Example: “ 2/10, n/30 ” – customer receives a 2% discount if payment is made within 10 days; otherwise, the full amount, is due within 30 days. This provides two benefits: a. It prompts the purchaser to pay early, which, in turn, increases the seller’s cash available. b. Since customers tend to pay bills providing discounts first, a sales discount also decreases the chances that the customer will run out of funds before paying their bill. 1
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Sales discounts also benefit the purchaser. If the terms are 2/10, n/30, then the difference in the price is due to borrowing from the seller for 20 days (from the 10 th to the 30 th ). To determine the annual interest rate, assume the original purchase was for $100 of merchandise: Amount saved / amount paid = interest rate for 20 days $2 / $98 = 2.04% To annualize the interest rate: Days in a year / days financed x 20 day interest rate = annual interest rate [365 / 20] x 2.04 = 37.23% Therefore, paying on time saves the company incurring interest expense. B. Sales Returns and Allowances 1. A contra revenue account used to record the return of goods previously sold. It reduces gross sales to arrive at the net sales presented on the income statement. 2. Also used to make adjustments to the sales price, as in the case of damaged goods. 3. Important to maintain this account rather than to directly debit (reduce) the sales revenue account, because the SR&A account provides important information for management regarding the quality of sales and customer satisfaction.
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This note was uploaded on 11/15/2010 for the course ACCT 229 taught by Professor Strawser during the Fall '06 term at Texas A&M.

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