LECTURE NOTES FOR CHAPTER 6
First of all, did everyone notice that we jumped from chapter 4 to chapter 6. We simply
don’t have time to cover every chapter, so #5 is the one that isn’t going to be covered.
Chapter 6 is a biggie in your accounting career because this is where we make the big
jump from accounting for a service company to accounting for a merchandising
For the first four chapters in this book, we were accounting for a
People like doctors, lawyers and bookies. Those people don’t sell a
product, they perform a service; thus the term “service company.
Starting with chapter 6
and continuing for the rest of the course, we’ll be accounting for a company that buys and
sells merchandise; thus the term “merchandising company.
As you might suspect, in making this big jump, we’re going to have to learn several new
terms, accounts, and formulas.
First of all, look at the income statement on page 254.
Scary isn’t it?
Doesn’t look at all like the income statement that you studied back on
The ‘trick” to learning this bad boy is to break it down into small chunks, learn
each chunk, then put the chunks together, and first thing you know, you’ve got an income
The first chunk we’re going to study is “Net Sales” Look up at the top of the
income statement to see where that item goes in the big scheme of things.
about the items that go into computing net sales.
When do you record a sale.
Duh, when you sell something? NO! The
key word there is “something”.
You don’t record a sale when you sell
“something”, you only record a sale when you sell THAT ITEM THAT YOU
ARE IN THE BUSINESS OF SELLING. For example, when a grocery store sells
groceries, that’s a sale.
When that same grocery store sells an old computer that
been sitting around, that is not a sale because grocery stores are not in the
business of selling computers.
If an electronics store sold a computer, that would
be a sale, because electronics stores ARE in the business of selling computers.
Sales is a revenue account, and like all revenue accounts, goes at the top of the
income statement, and is increased by a credit.
Sometimes we’ll sell merchandise to a customer and he
isn’t happy with it.
Maybe it was the wrong color, wrong size or maybe it just
Whatever the reason, the customer brings the item back to us and
asks for a refund.
Guess what you call it when we make a
and the item is
. You got it, sales returns.
That account is a “contra account” Its
purpose is to tag along after the sales account in order to reduce the balance in
Sales from the amount that was originally sold to the amount that “stayed sold”
This account is increased by a debit and goes on the income statement right
beneath the Sales account.