Final Review Part II

# Final Review Part II - Chapter 6 Credit Card Discounts...

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Page 1 Credit Card Discounts Sales Discounts Sales Returns Contra-Revenue Accounts Calculating Bad Debt Expense via % of Credit Sales Method Aging Method Chapter 6

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Page 2 Companies often sell direct to customers for cash or credit cards What happens when a company makes a sale for cash for \$1,000? Cash \$1,000 Revenue \$1,000 What happens when they make a sale on a credit card for \$1,000? If 3% charge from credit card companies. So, is a cash sale for \$1,000 the same as a \$1,000 sale on a credit card? We must account for the credit card discount (\$1,000*3% = \$30). Cash \$970 Discount – Credit Card \$30 Revenue \$1,000 This discount is a contra–revenue account. Therefore, it reduces what is shown as revenue on the income statement. Revenue shown “net”. Focusing on Revenue, Receivable & Cash
Page 3 What happens when a company makes a \$1,000 sale to another company on credit? A/R \$1,000 Revenue \$1,000 Typically, credit sales have terms. For example, net payment is due within 15 days. You’ll see this referred to as: n/15 As an incentive to get customers to pay more quickly, many firms offer discounts if customers pay quickly. For example, if you pay within 5 days, a 2% discount can be taken. If the discount is not taken, net payment is still due within 15 days. You’ll see this referred to as: 2/5, n/15 Focusing on Revenue, Receivable & Cash

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Page 4 What happens when customers take advantage of the discount? Similar to how we deal with the credit card discount: Original journal entry when sale is made: A/R \$1,000 Revenue \$1,000 Just like you’re used to. However, when a customer pays within the discount period, you’ve got to consider the discount Cash \$980 Discount – Sales \$20 A/R \$1,000 This discount is also a contra–revenue account. Therefore, it reduces what is shown as revenue on the income statement. Revenue shown “net”. Focusing on Revenue, Receivable & Cash
Page 5 What about customers that return items? Should these be sales? What happens when a company makes a \$1,000 sale for cash? Original journal entry when sale is made: Cash \$1,000 Revenue \$1,000 Customer informs us that they will be returning \$50 of the items because the items were not the correct size. Customer wants a refund. How would you account for this? Separate account or just a reduction of sales? Sales Returns \$50 Cash \$50 This discount is also a contra–revenue account. Therefore, it reduces what is shown as revenue on the income statement. Revenue shown “net”. Focusing on Revenue, Receivable & Cash

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Page 6 We also know that all customers that buy on credit will not pay. How do we handle these situations? When should we record and where should the expense show up on the income statement? Knowing at time of sale that all of our customers aren’t going to
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Final Review Part II - Chapter 6 Credit Card Discounts...

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