{"id":1678,"date":"2015-07-15T14:02:53","date_gmt":"2015-07-15T14:02:53","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finaccountingxmaster\/?post_type=chapter&p=1678"},"modified":"2017-08-22T19:40:11","modified_gmt":"2017-08-22T19:40:11","slug":"seller-entries","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/seller-entries\/","title":{"raw":"Seller Entries under Perpetual Inventory Method","rendered":"Seller Entries under Perpetual Inventory Method"},"content":{"raw":"The accounting is very different for sellers than for buyers.\u00a0 Remember, under the perpetual inventory method, we used a combination of 3 accounts (Cash, Inventory and Accounts Payable) on the buyer side.\u00a0 This is not the case for the seller.\u00a0 The seller will use the following accounts:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Name<\/strong><\/td>\r\nAccount Type<\/strong><\/td>\r\nIncreases<\/strong><\/td>\r\nDecreases<\/strong><\/td>\r\n<\/tr>\r\n
Cash<\/td>\r\nCurrent asset<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Accounts Receivable<\/td>\r\nCurrent asset<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Merchandise Inventory<\/td>\r\nCurrent asset<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Sales Revenue<\/td>\r\nRevenue<\/td>\r\nCredit<\/td>\r\nDebit<\/td>\r\n<\/tr>\r\n
Sales Discounts*<\/td>\r\nRevenue<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Sales Returns and Allowances*<\/td>\r\nRevenue<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Cost of Goods Sold<\/td>\r\nExpense<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n
Delivery Expense<\/td>\r\nExpense<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n*Sales discounts and sales returns and allowances are contra-accounts.\u00a0 Notice how they increase with a debit and decrease with a credit even though they are revenue accounts.\r\n\r\nCost of goods sold<\/b><\/span>\r\n

Cost of goods sold is exactly what the account name reads:\u00a0 it is the cost of the goods merchandise inventory)\u00a0to the\u00a0seller that is now being sold to customers.\u00a0 Cost of goods sold is not the price charged to customers but what a company paid for the goods they are now selling.\u00a0<\/em> Cost of Goods Sold is an EXPENSE<\/strong> item. Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a reduction to Revenue<\/em>. \u00a0 \u00a0<\/span><\/p>\r\n\r\n

\u00a0Recording Sales<\/h3>\r\nSales are recorded in a Sales Revenue (or Sales) account and is the price we charge to the customers.\u00a0 Sales can be cash or have credit terms (on account) using Accounts Receivable since we will receive money from the customer in the future.\u00a0 To record sales, we will debit Cash or Accounts Receivable, depending on payment, and credit Sales Revenue.\r\n\r\nBut, we must also match the revenue and expenses incurred (remember the matching principle?) and we will record the expense cost of goods sold.\u00a0 Remember, cost of goods sold is the seller's cost for the items they are now selling to a customer and is NOT the selling price.\u00a0 We begin learning this concept by having cost of goods sold amounts provided but in a later section, you will learn to calculate the amount yourself.\u00a0 We will debit the expense Cost of Goods Sold but what was it we were selling?\u00a0 Right!\u00a0 Merchandise or merchandise inventory so we will reduce (credit) merchandise inventory since we no longer have the goods.\r\n

To illustrate the perpetual inventory\u00a0method journal entries, assume that Smith Company made two sales of merchandise to Hanlon Food Store:<\/p>\r\n\r\n

    \r\n \t
  • On May 4, Smith sold $30,000 of merchandise with credit terms of 2\/10, n30 and shipping terms\u00a0FOB Destination.\u00a0 The original cost to Smith was $18,000.<\/li>\r\n \t
  • on May 21, Smith sold $20,000 of merchandise for cash with shipping terms FOB Shipping Point.\u00a0 The original cost to Smith was $15,000.<\/li>\r\n<\/ul>\r\n

    The journal entries to record the sale and cost of goods sold for each date would be:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Date<\/strong><\/td>\r\nAccount<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    May 4<\/td>\r\nAccounts Receivable<\/td>\r\n\u00a0 30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Sales Revenue<\/td>\r\n<\/td>\r\n\u00a0 30,000<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record sale of merchandise on credit\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n
    May 4<\/td>\r\nCost of goods sold<\/td>\r\n\u00a0 18,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Merchandise Inventory<\/td>\r\n<\/td>\r\n\u00a0 18,000<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record cost of merchandise sold to customers.\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n
    <\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    May 21<\/td>\r\nCash<\/td>\r\n\u00a0 20,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0 Sales Revenue<\/td>\r\n<\/td>\r\n20,000<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record sale of merchandise for cash.<\/em><\/td>\r\n<\/tr>\r\n
    May 21<\/td>\r\nCost of goods sold<\/td>\r\n\u00a0 15,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Merchandise Inventory<\/td>\r\n<\/td>\r\n\u00a0 15,000<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record cost of merchandise sold to customers.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

    Notice how each transaction has 2 entries.\u00a0 One to record the sale to the customer and one to record the usage of inventory as a cost of goods sold.<\/p>\r\n\r\n

    Shipping on Sales<\/h3>\r\nWe learned shipping terms tells you who is responsible for paying for shipping.\u00a0 FOB Destination means the seller is responsible for paying shipping and the buyer would not need to pay or record anything for shipping.\u00a0 FOB Shipping Point means the buyer is responsible for shipping and must pay and record for shipping.\u00a0 As the seller, we will record any shipping costs in the Delivery Expense<\/strong> account as a debit.\u00a0 We will credit cash or accounts payable, depending on if we paid it or not.\r\n\r\nIn our two transactions above, the May 4 sale has shipping terms of FOB Destination so the seller would pay for shipping.\u00a0 In the May 21 sale, the shipping terms FOB Shipping Point means the buyer is responsible and the seller will not record anything for shipping.\r\n\r\nSmith Company paid $100 cash on May 4 for shipping on the May 4 sale to Hanlon Food Store.\u00a0 The journal entry to record this transaction would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Date<\/strong><\/td>\r\nAccount<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    May 4<\/td>\r\nDelivery Expense<\/td>\r\n100<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Cash<\/td>\r\n<\/td>\r\n100<\/td>\r\n<\/tr>\r\n
    <\/td>\r\nTo record shipping costs for sales.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

    Sales Returns and Allowances<\/h3>\r\nMerchandising companies usually allow customers to return goods that are defective or unsatisfactory for a variety of reasons, such as wrong color, wrong size, wrong style, wrong amounts, or inferior quality.\u00a0 A sales return<\/strong> is merchandise returned by a buyer.\u00a0A sales allowance<\/strong> is a deduction from the original invoiced sales price granted when the customer keeps the merchandise<\/em> but is dissatisfied for any of a number of reasons, including inferior quality, damage, or deterioration in transit.\r\n\r\nWhen a seller agrees to the sales return or sales allowance, the seller sends the buyer a credit memorandum indicating a reduction (crediting) of the buyer\u2019s account receivable. A credit memorandum becomes the basis for recording a sales return or a sales allowance.\r\n\r\nIn theory, sellers could record both sales returns and sales allowances as debits to the Sales account because they cancel part of the recorded selling price.\u00a0 However, because the amount of sales returns and sales allowances is useful information to management, it should be shown separately. The amount of returns and allowances in relation to goods sold can indicate the quality of the goods (high-return percentage, equals low quality) or of pressure applied by salespersons (high-return percentage, equals high-pressure sales).\r\n\r\nSellers record sales returns and sales allowances in a separate Sales Returns and Allowances account.<\/strong> The Sales Returns and Allowances account is a contra revenue account (to Sales) that records the selling price of merchandise returned by buyers or reductions in selling prices granted.\r\n\r\nThe accounting method will be different for a sales return and an allowance.\u00a0 In a sales allowance, the customer is not returning any merchandise and we will only adjust the customer side of the transactions (sales and accounts receivable).\u00a0 In a sales return, the customer is actually returning merchandise.\u00a0 We will need to\u00a0reduce the customer side (sales and accounts receivable) and\u00a0increase the inventory side (inventory and cost of goods sold).\u00a0 The inventory is returned to the seller which means we need to add it back to inventory and remove the expense since it is no longer sold.\r\n\r\nFollowing are two examples illustrating the recording of sales returns in the Sales Returns and Allowances account:\r\n
      \r\n \t
    • Assume that a company grants a\u00a0$ 400 allowance<\/strong> to a customer for damage resulting from improperly packed merchandise. If the customer has not yet paid the account, the required entry would be:<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      Sales Returns and Allowances<\/td>\r\n400<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0 \u00a0 Accounts Receivable<\/td>\r\n<\/td>\r\n400<\/td>\r\n<\/tr>\r\n
      To record sales allowance granted to a customer.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf the customer has already paid the account, the credit is to Cash instead of Accounts Receivable. If the customer took a 2% discount when paying the account, the refund entry would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
      Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
      Sales Returns and Allowances<\/td>\r\n400<\/td>\r\n<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 \u00a0 \u00a0 Sales Discounts (400 x 2%)<\/td>\r\n<\/td>\r\n8<\/td>\r\n<\/tr>\r\n
      \u00a0\u00a0 \u00a0 \u00a0 Cash (400 - 8)<\/td>\r\n<\/td>\r\n392<\/td>\r\n<\/tr>\r\n
      To record sales allowance refund to customer less discount.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n
        \r\n \t
      • Assume instead that a customer returns<\/strong>\u00a0$300 of goods sold on account.\u00a0 The goods cost the seller\u00a0$200. Remember, a return requires 2 entries -- one for the sales side and one for the inventory side. <\/em>\u00a0If payment has not yet been received, the required entry is:<\/li>\r\n<\/ul>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        Account<\/strong><\/td>\r\nDebit <\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
        Sales Returns and Allowances<\/td>\r\n300<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        \u00a0\u00a0 \u00a0 \u00a0 Accounts Receivable<\/td>\r\n<\/td>\r\n300<\/td>\r\n<\/tr>\r\n
        To record customer return on credit sale.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n
        <\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        Merchandise Inventory<\/td>\r\n200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        \u00a0\u00a0 \u00a0 \u00a0 Cost of goods sold<\/td>\r\n<\/td>\r\n200<\/td>\r\n<\/tr>\r\n
        To record receipt of returned merchandise.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf the customer has already paid the account, the credit is to Cash instead of Accounts Receivable. If the customer took a 2% discount when paying the account, the refund entry would be (note: there would be no change to the inventory entry<\/em>):\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        Account<\/strong><\/td>\r\nDebit\u00a0 <\/strong><\/td>\r\n\u00a0Credit\u00a0 <\/strong><\/td>\r\n<\/tr>\r\n
        Sales Returns and Allowances<\/td>\r\n300<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        \u00a0\u00a0 \u00a0 \u00a0 Sales Discounts (400 x 2%)<\/td>\r\n<\/td>\r\n6<\/td>\r\n<\/tr>\r\n
        \u00a0\u00a0 \u00a0 \u00a0 Accounts Receivable<\/td>\r\n<\/td>\r\n294<\/td>\r\n<\/tr>\r\n
        To record customer refund with 2% discount.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n
        <\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        Merchandise Inventory<\/td>\r\n200<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        \u00a0\u00a0 \u00a0 \u00a0 Cost of goods sold<\/td>\r\n<\/td>\r\n200<\/td>\r\n<\/tr>\r\n
        To record receipt of returned merchandise.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

        \u00a0Receiving Payment from Customers<\/h3>\r\nRemember, the credit terms (or terms) provides information to the buyer about when the invoice is due and if there is a discount allowed for paying the invoice early.\u00a0 The discount is not recorded until payment is received because the seller does not know if a buyer will take the discount or not.\u00a0 Discounts are recorded in a contra-revenue account called Sales Discounts.<\/strong>\u00a0 Receiving payment will affect the customer side only and not inventory.\u00a0 We will be reducing the amount owed by the customer (accounts receivable) and increasing sales discounts (if any) and cash.\r\n\r\nFor example, Smith Company receives payment of the May 4 invoice from Hanlon Food Store on May 10.\u00a0 The customer took the 2% discount.\u00a0 The entry to record this transaction would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        Date<\/strong><\/td>\r\nAccount<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
        May 10<\/td>\r\nSales Discounts (30,000 x 2%)<\/td>\r\n600<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        <\/td>\r\nCash (30,000 - 600)<\/td>\r\n29,400<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Accounts Receivable<\/td>\r\n<\/td>\r\n30,000<\/td>\r\n<\/tr>\r\n
        <\/td>\r\nTo record customer payment with 2% discount.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf Hanlon had returned merchandise for $300 before paying the invoice, the entry to record this transaction with a 2% discount would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
        Sales Discounts (29,700 x 2%)<\/td>\r\n594<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        Cash (29,700 - 594)<\/td>\r\n29,106<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        \u00a0\u00a0 \u00a0 \u00a0 Accounts Receivable<\/td>\r\n<\/td>\r\n29,700<\/td>\r\n<\/tr>\r\n
        To record customer payment with 2% discount and return.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNote:\u00a0 This entry is the same with a sales return or a sales allowance.\r\n\r\nIf Hanlon had a $400 allowance but paid the invoice after the discount period on May 30, the entry to record the transaction (less the allowance) would be:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
        Date<\/strong><\/td>\r\nAccount<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
        May 30<\/td>\r\nCash (30,000 - 400)<\/td>\r\n29,600<\/td>\r\n<\/td>\r\n<\/tr>\r\n
        <\/td>\r\n\u00a0\u00a0\u00a0\u00a0 Accounts Receivable (30,000 - 400)<\/td>\r\n<\/td>\r\n29,600<\/td>\r\n<\/tr>\r\n
        <\/td>\r\nTo record customer payment less allowance and no discount.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

        Summary<\/h3>\r\nCost of goods sold is not the price charged to customers but what a company paid for the goods they are now selling.\u00a0 Cost of Goods Sold is an EXPENSE<\/strong> item.\u00a0\u00a0 Sales Discounts and Sales Returns and Allowances are contra-revenue accounts meaning they are REVENUE<\/strong> accounts but debits will increase and credits will decrease.\r\n\r\nSales revenue and sales return entries require 2 entries:\u00a0 one for the customer side (accounts receivable and sales) and one for the inventory side (cost of goods sold and inventory).\u00a0 Sales allowances require only the customer side.\r\n\r\n ","rendered":"

        The accounting is very different for sellers than for buyers.\u00a0 Remember, under the perpetual inventory method, we used a combination of 3 accounts (Cash, Inventory and Accounts Payable) on the buyer side.\u00a0 This is not the case for the seller.\u00a0 The seller will use the following accounts:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
        Name<\/strong><\/td>\nAccount Type<\/strong><\/td>\nIncreases<\/strong><\/td>\nDecreases<\/strong><\/td>\n<\/tr>\n
        Cash<\/td>\nCurrent asset<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
        Accounts Receivable<\/td>\nCurrent asset<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
        Merchandise Inventory<\/td>\nCurrent asset<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
        Sales Revenue<\/td>\nRevenue<\/td>\nCredit<\/td>\nDebit<\/td>\n<\/tr>\n
        Sales Discounts*<\/td>\nRevenue<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
        Sales Returns and Allowances*<\/td>\nRevenue<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
        Cost of Goods Sold<\/td>\nExpense<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n
        Delivery Expense<\/td>\nExpense<\/td>\nDebit<\/td>\nCredit<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

        *Sales discounts and sales returns and allowances are contra-accounts.\u00a0 Notice how they increase with a debit and decrease with a credit even though they are revenue accounts.<\/p>\n

        Cost of goods sold<\/b><\/span><\/p>\n

        Cost of goods sold is exactly what the account name reads:\u00a0 it is the cost of the goods merchandise inventory)\u00a0to the\u00a0seller that is now being sold to customers.\u00a0 Cost of goods sold is not the price charged to customers but what a company paid for the goods they are now selling.\u00a0<\/em> Cost of Goods Sold is an EXPENSE<\/strong> item. Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a reduction to Revenue<\/em>. \u00a0 \u00a0<\/span><\/p>\n

        \u00a0Recording Sales<\/h3>\n

        Sales are recorded in a Sales Revenue (or Sales) account and is the price we charge to the customers.\u00a0 Sales can be cash or have credit terms (on account) using Accounts Receivable since we will receive money from the customer in the future.\u00a0 To record sales, we will debit Cash or Accounts Receivable, depending on payment, and credit Sales Revenue.<\/p>\n

        But, we must also match the revenue and expenses incurred (remember the matching principle?) and we will record the expense cost of goods sold.\u00a0 Remember, cost of goods sold is the seller’s cost for the items they are now selling to a customer and is NOT the selling price.\u00a0 We begin learning this concept by having cost of goods sold amounts provided but in a later section, you will learn to calculate the amount yourself.\u00a0 We will debit the expense Cost of Goods Sold but what was it we were selling?\u00a0 Right!\u00a0 Merchandise or merchandise inventory so we will reduce (credit) merchandise inventory since we no longer have the goods.<\/p>\n

        To illustrate the perpetual inventory\u00a0method journal entries, assume that Smith Company made two sales of merchandise to Hanlon Food Store:<\/p>\n