Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Sales Revenue, Receivables, and Cash
Chapter 6 Chapter 6: Reporting and Interpreting Sales Revenue, Receivables, and Cash.

LO1 Learning Objectives
Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers, wholesalers, manufacturers, and service companies. LO1 Our first learning objective in Chapter 6 is to apply the revenue principle to determine the accepted time to record sales revenue for typical retailers, wholesalers, manufacturers, and service companies.

Accounting for Sales Revenue
The revenue principle requires that revenues be recorded when earned: Goods or services have been delivered. Amount of customer payments known. The revenue principle requires that revenues be recorded when earned. Revenues are considered to be earned when three conditions are met:  Goods have been delivered or services have been rendered.  The price for the goods or services is known.  Collection from the customer is reasonably assured. Collection is reasonably assured.

Analyze the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. LO2 Our second learning objective in Chapter 6 is to analyze the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales.

Reporting Net Sales Companies record credit card discounts, sales discounts, and sales returns and allowances separately to allow management to monitor these transactions. Companies record credit card discounts, sales discounts, and sales returns and allowances separately to allow management to monitor these transactions. Credit card discounts, sales discounts, and sales returns and allowances are contra-revenue accounts, deducted from sales revenue in the income statement to arrive at net sales. We will discuss each of these contra-revenue accounts in the following slides.

Credit Card Sales Companies accept credit cards for several reasons:
To increase sales. To avoid providing credit directly to customers. To avoid losses due to bad checks. To avoid losses due to fraudulent credit card sales. To receive payment quicker. Companies accept credit cards for several reasons: To increase sales. To avoid providing credit directly to customers. To avoid losses due to bad checks. To receive payment quicker.

Credit Card Sales When credit card sales are made, the company must pay the credit card company a fee for the service it provides. When credit card sales are made, the company must pay the credit card company a fee for services provided by the credit card company. The fee is typically between 2 and 4 percent of the amount charged by the customer using a credit card.

Fontana Shoes Sales on Account
When companies allow customers to purchase merchandise on an open account, the customer promises to pay the company in the future for the purchase. When companies allow customers to purchase merchandise on an open account, the customer promises to pay the company in the future for the purchase. In most cases the customer is offered a small discount to pay cash within a short period after the sale. Fontana Shoes

2/10, n/30 Read as: “Two ten, net thirty” Sales Discounts
Customers, purchasing on open account,are usually offered a sales discount to encourage early payment. The sales discount terms are typically written as this slide shows. This particular discount term would be read as “two ten, net thirty.” When customers purchase on open account, they may be offered a sales discount to encourage early payment.

2/10, n/30 Sales Discounts Discount Percentage
# of Days in Discount Period Otherwise, the Full Amount Is Due Maximum Days in Credit Period The first number represents the discount percentage, 2 percent. The second number represents the discount period, 10 days. The letter “n” stands for the word net, the invoice amount. The last number represents the entire credit period. In this case, if the customer pays within 10 days, then a 2 percent discount may be deducted from the invoice amount. If not, then the full invoice amount is due within 30 days.

To Take or Not Take the Discount
With discount terms of 2/10,n/30, a customer saves $2 on a $100 purchase by paying on the 10th day instead of the 30th day. Interest Rate for 20 Days = Amount Saved Amount Paid $2 $98 = % Interest Rate for 20 Days = With discount terms of 2/10,n/30, a customer saves $2 on a $100 purchase by paying by the 10th day instead of the 30th day. If not paid until the thirtieth day, the customer has incurred $2 of interest on a $98 debt for twenty days. The annualized interest rate for the decision to defer payment for 20 days is percent. Even if the customer had to borrow money at 12 or 15 percent interest to be able to pay in time to take the discount, the money should be borrowed to avoid paying 37 percent interest. Annual Interest Rate = 365 Days 20 Days × 2.04% = %

Sales Returns and Allowances
Debited for damaged merchandise. Debited for returned merchandise. Customers may return undamaged merchandise for a full refund. This is called a sales return. Customers may also return merchandise that is damaged but usable. In this case the seller may offer the customer a reduction from the original selling price to entice the customer to keep the damaged merchandise. This is called a sales allowance. For either type of return, the seller debits sales returns and allowances which is a contra revenue account. Contra revenue account.

Analyze and interpret the gross profit percentage.
Learning Objectives Analyze and interpret the gross profit percentage. LO3 Our third learning objective in Chapter 6 is to analyze and interpret the gross profit percentage.

Gross Profit Percentage
Gross Profit Net Sales = In 2003, Deckers reported gross profit of $51,345,000 on sales of $121,055,000. The difference between sales revenue and cost of goods sold is called gross profit. The gross profit percentage indicates how much of each sales dollar is left, after deducting the cost of goods sold, to cover expenses and provide a profit. It is calculated as gross profit divided by net sales. Other things being equal, the company with the higher gross profit percentage is pricing its products higher. In 2003, Deckers reported gross profit of $51,345,000 on sales of $121,055,000. Let’s calculate Decker’s gross profit percentage. All other things equal, a higher gross profit results in higher net income.

Gross Profit Percentage
Gross Profit Net Sales = Gross Profit Percentage $51,345,000 $121,055,000 = = % All other things equal, a higher gross profit results in higher net income. Deckers’ 2003 gross profit percentage is 42.4 percent, obtained by dividing gross profit of $51,345,000 by net sales of $122,055,000. Notice that Deckers’ 2003 gross profit percentage is higher than one of its competitors and lower than another competitor.

Measuring and Reporting Receivables
Accounts Receivable Trade receivables are amounts owed to the business for credit sales of goods, or services. Nontrade receivables are amounts owed to the business for other than business transactions. Accounts receivable are amounts owed to the business on open account. There are two types of receivables:  Trade receivables are amounts owed to the business for credit sales of goods, or services.  Nontrade receivables are amounts owed to the business for other than business transactions. For example, personal loans to employees are nontrade receivables.

Measuring and Reporting Receivables – Notes Receivable
Term $1,200 Goleta, CA January 5, 2006 Sixty days after date I promise to pay to the order of Deckers Outdoor Corporation One thousand two hundred Dollars Payable at First Goleta National Bank Value received with interest at per annum No Due Goodson Sporting Goods 10242 March 6, 2007 12% Ivan Goodson Payee Principal Interest Rate Maker Part I Occasionally a business will want to formalize an obligation from a customer by requiring the customer to sign a note evidencing the debt. A note receivable is a written promise from a customer to pay a specific amount at a specific future date. As you see on your screen, a note specifies an interest rate, the principal amount, and the due date. Part II The payee on the note is the recipient of the cash on the due date. In this note, Ivan Goodson (the maker), representing Goodson Sporting Goods, promises to pay $1,200 dollars on March 6, 2007 to Deckers Outdoor Company, (the payee). Due Date

Estimate, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. LO4 Our fourth learning objective in Chapter 6 is to estimate, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.

Accounting for Bad Debts
Bad debts result from credit customers who will not pay the business the amount they owe, regardless of collection efforts. Businesses extend credit to customers to stimulate sales, but credit sales are not without costs. Some customers may be unwilling or unable to pay off their accounts receivable. Bad debts result from credit customers who will not pay the amount they owe, regardless of collection efforts. Companies must account for the fact that these customers may not be able to pay the amounts they owe. We will focus on the allowance method of accounting for bad debts.

Bad Debt Expense Record in same accounting period. Matching Principle The allowance method attempts to match bad debts expense in the period with the related revenue. This method has two advantages:  It adheres to the matching principle because the bad debts expense is recorded in the period of the sale, and  It reports accounts receivable on the balance sheet at the estimated amount of cash to be collected. Sales Revenue

Most businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period. The actual amount of bad debts may not be known with certainty at the end of an accounting period. The allowance method requires that an estimate of bad debts be made and recorded at the end of each period, so businesses record an estimate of the bad debt expense with an adjusting entry at the end of the accounting period. Let’s look at an example.

Recording Bad Debt Expense Estimates
Deckers estimated bad debt expense for 2003 to be $504,000. Prepare the adjusting entry. To illustrate the adjusting entry, we will look at an example from Deckers Outdoor Corporation. Deckers estimated bad debt expense for 2003 to be $504,000. Let’s prepare the adjusting entry.

Recording Bad Debt Expense Estimates
Deckers estimated bad debt expense for 2003 to be $504,000. Prepare the adjusting entry. Bad Debt Expense is normally classified as a selling expense and is closed at year-end. Part I Deckers debits bad debt expense and credits allowance for doubtful accounts for $504,000. Part II Bad debt expense is normally classified as a selling expense on the income statement. Allowance for doubtful accounts is a contra asset account that is deducted from accounts receivable on the the balance sheet. Contra asset account

Allowance for Doubtful Accounts
Balance Sheet Disclosure Because we do not want to overstate assets, we must show accounts receivable at its net realizable value on the balance sheet. Net realizable value is the amount of accounts receivable that we actually think we will collect. The allowance for doubtful accounts is subtracted from the accounts receivable balance. The reported value is called net accounts receivable. Amount the business expects to collect.

Writing Off Uncollectible Accounts
When it is clear that a specific customer’s account receivable will be uncollectible, the amount should be removed from the Accounts Receivable account and charged to the Allowance for Doubtful Accounts. Now, let’s see what happens when we determine that a specific customer will not be able to pay the amount owed. When it is clear that a specific customer’s account receivable will be uncollectible, the amount should be removed from accounts receivable and charged to allowance for doubtful accounts. Let’s look at an example from Deckers.

Deckers’ total write-offs for 2003 were $876,000. Prepare a summary journal entry for these write-offs. In 2003 Deckers determined that customers with balances totaling $876,000 would not pay. We will make one summary entry for all of these customers.

Deckers’ total write-offs for 2003 were $876,000. Prepare a summary journal entry for these write-offs. When using the allowance method, we write off the specific uncollectible accounts to allowance for doubtful accounts by debiting allowance for doubtful accounts and crediting accounts receivable for $ There is no additional entry to recognize bad debts. We previously recognized bad debts expense when we made the end of period bad debts expense adjusting entry.

Assume that before the write-off, Deckers’ Accounts Receivable balance was $11,000,000 and the Allowance for Doubtful Accounts balance was $1,000,000. Let’s see what effect the total write-offs of $876,000 had on these accounts. Now assume that before the write-off entry the balance in accounts receivable was $11,000,000 and that the balance in allowance for doubtful accounts was $1,000,000. Let’s see what effect the write-off had on these accounts.

After the $ write off, the accounts receivable balance is reduced from $11,000,000 to $10,124,000 and the allowance for doubtful accounts balance is reduced from $1,000,000 to $124,000. However, note that net accounts receivable, the amount Deckers expects to collect, is unchanged at $10,000,000. The total write-offs of $876,000 did not change net accounts receivable nor did it affect any income statement accounts. Notice that the total write-offs of $876,000 did not change the net realizable value nor did it affect any income statement accounts.

Methods for Estimating Bad Debts
Percentage of credit sales or Aging of accounts receivable ???? How does a company come up with the estimate for the bad debt expense adjusting entry at the end of the year? There are two methods from which to choose:  Percentage of credit sales method, and  Aging of accounts receivable method. Let’s look at the percentage of credit sales method first.

Percentage of Credit Sales
Bad debt percentage is based on actual uncollectible accounts from prior years’ credit sales. Focus is on determining the amount to record on the income statement as Bad Debt Expense. Using the percentage of credit sales method, a bad debt percentage is based on records of actual uncollectible accounts from prior years’ credit sales. The focus is on determining the amount to record on the income statement as bad debt expense.

When using the percentage of credit sales method, the bad debt expense estimate at the end of the period is determined by multiplying current period credit sales by an established bad debt loss rate percentage. The bad debt loss rate percentage is determined based on past history of the company and current economic trends. Let’s look at an example from a company called Kid’s Clothes.

In 2006, Kid’s Clothes had credit sales of $600,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2006? $600,000 × .01 = $6,000 Now, prepare the adjusting entry. Part I In the current year Kid’s Clothes had credit sales of $600, Past experience indicates that bad debts are one percent of sales. Compute the bad debts expense for the year before advancing. Part II Bad debts expense of $6,000 is found by multiplying $600,000 times one percent. Now let’s prepare the journal entry to record the bad debts expense estimate.

Kid’s Clothes will debit bad debts expense and credit allowance for doubtful accounts for $6,000.

Now let’s discuss another method that is used to account for uncollectible accounts.
Now let’s discuss another method, based on the age of outstanding receivables, that is used to account for uncollectible accounts.

Aging of Accounts Receivable
Focus is on determining the desired balance in the Allowance for Doubtful Accounts on the balance sheet. When using the aging of accounts receivable method to arrive at an estimate of bad debt expense, the focus is on determining the desired balance in allowance for doubtful accounts on the balance sheet. Let’s see how the aging of accounts receivable works.

Aging Schedule Each customer’s account is aged by breaking down the balance by showing the age (in number of days) of each part of the balance. An aging of accounts receivable for Kid’s Clothes in 2006 might look like this . . . First we classify accounts receivable by age. Second, for each age group we determine the likelihood of the accounts being uncollectible. Third, for each age group we calculate a separate allowance amount. Then, we add up all the allowance amounts and that gives us the desired balance in the allowance for doubtful accounts. The following slide shows us what an aging schedule for Kid’s Clothes might look like.

Aging Schedule Part I. First we decide on the aging categories for the individual accounts receivable from zero to thirty days from the date of sale to over ninety days from the the date of sale. Then we list individual accounts receivable from Kid’s Clothes alphabetically with the dollar amounts in each age category. Then we total the amounts in each age category column. Part II Next, based on past experience, we will estimate the percentage of uncollectible accounts in each time category. Based on past experience, the business estimates the percentage of uncollectible accounts in each time category.

Aging Schedule Part I We estimate the percentage of uncollectible accounts in each time category. For the zero to thirty days age group, one percent is expected to be uncollectible. For the thirty to sixty days age group, four percent is expected to be uncollectible, and so on. Notice that the older the age group the higher the uncollectible percentage. Part II After determining the percentages for each age group, we will multiply these percentages by the appropriate column totals. These percentages are then multiplied by the appropriate column totals.

Aging Schedule The column totals are then added to arrive at the total estimate of uncollectible accounts of $1,201. After we multiply the balance of each age group by its uncollectible percentage, we add the amounts for each age category column to get the total estimated uncollectible amount of $1,201. This is the balance we want in allowance for doubtful accounts.

Record the Dec. 31, 2006, adjusting entry assuming that the Allowance for Doubtful Accounts currently has a $50 credit balance. Now let’s record the year-end adjusting entry for bad debts expense assuming that the allowance for doubtful accounts currently has a $50 dollar credit balance.

After posting, the Allowance account would look like this . . . Since we want the credit balance in allowance for doubtful accounts to be $1201, and the account currently has a credit balance of $50, we only need to credit this account for $1,151. The adjusting entry requires a debit to bad debt expense and a credit to allowance for doubtful accounts for $1,151. The next slide will show us the allowance for doubtful accounts after posting the adjusting entry.

Allowance for Doubtful Accounts Notice that the balance after adjustment is equal to the estimate of $1,201 based on the aging analysis performed earlier. The beginning balance in the account was $50. This is the amount remaining in the account at the end of the year, after write-offs of specific accounts, but before the year-end bad debts adjusting entry. The adjusting entry for $1,151 brings the account to the desired balance of $1,201, the amount we determined from our aging schedule.

Part I Here’s a summary of the aging of accounts receivable method. The existing balance in allowance for doubtful accounts is subtracted from the desired balance to get the amount for the bad debts expense adjusting entry. Part II. If the existing balance in allowance for doubtful accounts has a debit balance before the adjusting entry, the debit balance is added to the desired balance to get the amount for the bad debts expense adjusting entry. A debit balance in the allowance account results when specific write-offs for the year are larger than the balance provided at the beginning of the year.

Analyze and interpret the accounts receivable turnover ratio and the effects of accounts receivable on cash flows. LO5 Our fifth learning objective in Chapter 6 is to analyze and interpret the accounts receivable turnover ratio and the effects of accounts receivable on cash flows.

Receivables Turnover Net Sales Average Net Trade Receivables Receivables Turnover = Deckers reported 2003 net sales of $121,055,000. December 31, 2002, receivables were $18,745,000 and December 31, 2003, receivables were $20,851,000. The receivables turnover ratio tells us the number of times per year a company can convert its accounts receivable into cash. For any company, the higher the turnover, the faster the cash collection on accounts receivable. We calculate receivables turnover by dividing net credit sales by average net receivables. Deckers reported 2003 net sales of $121,055, December 31, 2002, receivables were $18,745,000 and December 31, 2003, receivables were $20,851,000. Let’s calculate the receivables turnover ratio. This ratio measures how many times average receivables are recorded and collected for the year.

Receivables Turnover Receivables Turnover Net Sales
Average Net Trade Receivables Receivables Turnover = $121,055,000 ($18,745,000 + $20,851,000) ÷ 2 Receivables Turnover = = 6.1 This ratio measures how many times average receivables are recorded and collected for the year. Part I Average net trade receivables is determined by adding the $18,745,000 beginning balance to the $20,851,000 ending balance and dividing the total by two. The result is divided into the net credit sales revenue for the year to obtain a receivables turnover ratio of 6.1 times. Part III Deckers has a lower receivables turnover than Skechers and Timberland.

Focus on Cash Flows Add Decrease in Accounts Receivable
Subtract Increase in Accounts Receivable Cash Collected from Customers Sales Revenue When there is a decrease in accounts receivable for the year, cash collections from customers are more than sales revenue. Using the indirect method of preparing the cash flow from operating activities portion of the statement of cash flows, we add the decrease in accounts receivable to reported net income. When there is an increase in accounts receivable for the year, cash collections from customers are less than sales revenue. Using the indirect method of preparing the cash flow from operating activities portion of the statement of cash flows, we subtract an increase in accounts receivable from reported net income.

Report, control, and safeguard cash.
Learning Objectives Report, control, and safeguard cash. LO6 Our sixth learning objective in Chapter 6 is to report, control, and safeguard cash.

Cash and Cash Equivalents
Checks Money Orders Cash and Cash Equivalents Cash includes currency, coins, and amounts on deposit in bank accounts, checking accounts, and savings accounts. Cash equivalents are short-term, highly liquid investments that are easily converted into a known amount of cash, are close to maturity, and are not sensitive to interest rate changes. Cash and cash equivalents are usually combined on the balance sheet. Certificates of Deposit Bank Drafts T-Bills

Internal Control of Cash
Internal control refers to policies and procedures that are designed to: Properly account for assets. Safeguard assets. Ensure the accuracy of financial records. An internal control system is a collection of policies and procedures that safeguard assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies. Specifically, internal controls should assist companies in maintaining adequate accounting information, ensure that all transactions are legitimate and properly authorized, and detect or prevent the unauthorized use of company assets. Of all assets, cash is the most susceptible to theft and fraud. For that reason, effective cash controls are essential. Cash is the asset most susceptible to theft and fraud.

Custody Recording Authorization Separation of Duties Separation of duties is one internal control practice that companies use to protect cash. The person handling cash should not be responsible for recording cash transactions. All disbursements should be duly authorized.

Bank Reconciliations Cash Controls Daily Deposits Purchase Approval In addition to separation of duties, internal controls for cash include: Promptly reconciling bank statements. Proper authorization for purchases. Proper authorization for cash payments. Making all payments using prenumbered checks. Allowing only a limited number of persons authorized to sign checks. Requiring daily deposits of cash receipts. Payment Approval Check Signatures Prenumbered Checks

Provides information for reconciling journal entries.
Bank Reconciliation Explains the difference between cash reported on bank statement and cash balance on company’s books. Provides information for reconciling journal entries. All businesses should prepare a bank reconciliation each month. The bank reconciliation should not be prepared by the same person who handles cash or accounts for cash transactions. A bank reconciliation explains the difference between the cash balance in the general ledger account and the amount shown on the bank statement. A bank reconciliation will identify any errors that need to be corrected by the company or the bank. Why are the balances different on the bank statement and on the cash ledger? Because of timing differences. Let’s look at how to prepare a bank reconciliation in more detail.

Bank Reconciliation Balance per Bank Balance per Book
+ Deposits by Bank (credit memos) + Deposits in Transit - Service Charge - NSF Checks - Outstanding Checks When we prepare a bank reconciliation, there are two sections. In one section, we reconcile the bank statement balance to the correct balance. In the other section, we reconcile the book balance to the correct balance. The correct balances in both sections should be equal. On the bank’s side, we will start with the balance on the bank statement and adjust it for outstanding checks, deposits in transit, and errors made by the bank. On the book’s side, we will start with the cash balance in the ledger and adjust it for collections made by the bank on our behalf, interest earned, bank service charges, customer checks that were drawn on accounts that were nonsufficient, and errors we made. Examples of collections made by the bank on our behalf are when the bank acts as a collection box for customer payments or when the bank collects a note receivable for us from a customer. ± Bank Errors ± Book Errors = Correct Balance = Correct Balance

Bank Reconciliation Balance per Bank + Deposits in Transit - Outstanding Checks ± Bank Errors = Adjusted Balance All reconciling items on the book side require an adjusting entry to the cash account. Balance per Book + Deposits by Bank (credit memos) - Service Charge - NSF Checks ± Book Errors = Correct Balance All reconciling items on the book side require an adjusting entry to the cash account. Now, let’s look at an example of a bank reconciliation.

Bank Reconciliation Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next page. Let’s prepare a bank reconciliation for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next page

Bank Reconciliation Outstanding checks totaled $2,417.
A $500 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously credited to our account by the bank. Before preparing the reconciliation, we need the following information: Outstanding checks totaled $2,417. A $500 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s nonsufficient funds check for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously credited to our account by the bank. Before advancing to the next slide, you should decide how each of these items affects the book or bank balance.

Bank Reconciliation We begin the reconciliation process with the bank balance of $9,610. Next, we add the $500 deposit in transit. Now, we have two deductions: the $486 bank error and the $2,417 of outstanding checks. We now have determined that the correct cash balance is $7,207. This is the amount of cash that must be shown on the company’s balance sheet at July 31.

Bank Reconciliation We complete the reconciliation by adjusting the balance in our general ledger account. Simmons earned $30 in interest on the checking account during the month of July, so we must add this amount to the book balance. A check was written for $268 but erroneously recorded on our books as $ We correct this error in the reconciliation by subtracting the difference, $28, from our book balance. Finally, we accepted a check and deposited it in the bank, but the check bounced because the maker did not have sufficient funds to cover the check. To correct this, we subtract the amount of the check, $225, from our general ledger cash balance. Notice that the correct balance on the bank and book sides of the reconciliation are the same. Our goal now is to adjust our book balance to the correct amount of $7,207. To do this we will need to make two adjusting entries. Let’s go to the next screen and begin making the adjustments

Bank Reconciliation To record the interest earned on our checking account, we debit the cash account and credit interest revenue for $30. To correct the bookkeeping error, we will debit supplies inventory for $28. The non-sufficient funds check must be placed in an account receivable account because the person still owes us the $225. We will credit the cash account for the total of two hundred fifty-three dollars. Now, the reconciliation process is complete.

Recording Discounts and Returns
Chapter Supplement A Recording Discounts and Returns Chapter Supplement A: Recording Discounts and Returns.

Prepare the Deckers journal entry.
Credit Card Sales On January 2, a Deckers factory store’s credit card sales were $3,000. The credit card company charges a 3% service fee. Prepare the Deckers journal entry. Credit card discounts, sales discounts, and sales returns and allowances are contra-revenue accounts, deducted from sales revenue in the income statement to arrive at net sales. Let’s look at some examples to see how we record these contra-revenue accounts. On January 2, credit card sales at a Deckers factory store were $3,000. The credit card company charges a 3% service fee. Prepare the Deckers journal entry.

Credit Card Discounts are reported as a contra-revenue account.
Credit Card Sales On January 2, a Deckers factory store’s credit card sales were $3,000. The credit card company charges a 3% service fee. Prepare the Deckers journal entry. Credit Card Discounts are reported as a contra-revenue account. The credit card service fee is 3 percent of $3,000, or $90. We record the credit card sales transaction with a debit to accounts receivable for $2,910, a debit to credit card discounts for $90, and a credit to sales revenue for $3,000. When preparing the income statement, we deduct the debit balance in the contra-revenue account, credit card discounts, from the credit balance in the sales revenue account. Now let’s consider an example dealing with sales discounts.

Sales Discounts On January 6, Deckers sold $1,000 of merchandise on credit with terms of 2/10, n/30. Prepare the Deckers journal entry. On January 6, Deckers sold $1,000 of merchandise on credit with terms of 2/10, n/30. Let’s prepare the Deckers journal entry.

Sales Discounts On January 6, Deckers sold $1,000 of merchandise on credit with terms of 2/10, n/30. Prepare the Deckers journal entry. We record the sale with a debit to accounts receivable and a credit to sales revenue for $1,000. In the next example we will assume that the customer paid within the discount period.

Sales Discounts On January 14, Deckers receives the appropriate payment from the customer for the January 6 sale. Prepare the Deckers journal entry. On January 14, Deckers receives the appropriate payment from the customer for the January 6 sale. Let’s prepare the Deckers journal entry.

Sales Discounts On January 14, Deckers receives the appropriate payment from the customer for the January 6 sale. Prepare the Deckers journal entry. $1,000 × 2% = $20 sales discount $1, $20 = $980 cash receipt The sales discount is 2 percent of $1,000, or $20. We record the cash receipt from the customer with a debit to cash for $980, a debit to sales discounts for $20, and a credit to accounts receivable for $1,000. When preparing the income statement, we deduct the debit balance in the contra-revenue account, sales discounts, from the credit balance in the sales revenue account. Next, let’s assume the customer paid after the ten-day discount period. Contra-revenue account

Sales Discounts If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Deckers make? If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Deckers make?

Sales Discounts If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Deckers make? Since the customer paid outside of the discount period, a sales discount is not granted. Since the customer paid outside of the discount period, a sales discount is not granted. The customer forfeits the available $20 discount and remits the entire $1,000. We record the cash receipt from the customer with a debit to cash and a credit to accounts receivable for $1,000.

On July 8, before paying, a customer returns $500 of sandals originally purchased on account from Deckers. The sandals originally cost Deckers $300. Prepare the Deckers journal entry. On July 8, before paying, a customer returns $500 of sandals originally purchased on account from Deckers. The sandals originally cost Deckers $300. Let’s prepare the Deckers journal entry.

On July 8, before paying, a customer returns $500 of sandals originally purchased on account from Deckers. The sandals originally cost Deckers $300. Prepare the Deckers journal entry. Similar to a sales entry, a return of merchandise requires two entries: one at retail and one at cost. The retail entry includes a debit to sales returns and allowances and a credit to accounts receivable for the sales price of $500. dollars. The cost entry includes a debit to merchandise inventory and a credit to cost of goods sold for $300, the cost of the returned inventory. This entry is a straight reversal of the cost entry that is made when the sale occurred.

Applying the Revenue Principle in Special Circumstances
Chapter Supplement B Applying the Revenue Principle in Special Circumstances Chapter Supplement B: Applying the Revenue Principle in Special Circumstances

Delayed Revenue Recognition: Installment Method
Generally, revenue is recognized when:  An exchange has taken place.  The earnings process is nearly complete.  Collection is probable. Uncertain collectibles result in delaying revenue recognition until cash is collected. Generally, revenue is recognized when:  An exchange has taken place.  The earnings process is nearly complete.  Collection is probable. When a great deal of uncertainty concerning the collectibility of sales exists, revenue recognition is postponed until cash is collected from the customer. This revenue recognition method is called the installment method. Cash collections may extend over several accounting periods, resulting in revenue recognition from the original sale being recognized over several accounting periods using the installment method. Installment method: revenue is recognized as cash is collected, often over several accounting periods.

Revenue Recognition Before the Earnings Process is Complete: Long-Term Construction Contracts
Completed Contract Method Percentage-of-Completion Method Revenue and expenses are recognized in the year the contract is completed. Construction-in progress years show no revenue or expenses. Revenue and expenses recognized each year as work is accomplished. Revenues each year are based on the ratio of costs incurred to total costs. Log-term construction projects may take several years to complete. Using the completed contract method of revenue recognition, construction revenues and expenses are not recognized until the project is completed. This method results in no income during the years of construction and large amounts of income in the year of completion. When the completed contract method is used for multi-year projects, the construction company’s financial statements are not representative of the company’s economic activities. We use the percentage of completion method to deal with this problem resulting from long-term construction projects. Using the percentage of completion method we recognize revenue and expenses each year as work is accomplished. The amount of revenue recognized each year of the project’s life is based on the ratio of costs incurred during the year to total costs. Let’s look at an example using the percentage-of-completion method to account for a long-term construction project.. Let’s look at an example of the percentage-of-completion method.

Acme Construction is constructing a building for Jones Foods over a three-year period for a total price of $50,000,000. Acme reported the following progress in year one: Acme Construction is constructing a building for Jones Foods over a three-year period for a total price of $50,000,000. The estimated total cost of the construction project is $40,000,000. During the first year, Acme incurred $10,000,000 of construction costs on the project. How much revenue and expense should be recognized on the project in year one using the percentage of completion method? How much revenue and expense should be recognized on the project in year one using the percentage of completion method?

Acme Construction is constructing a building for Jones Foods over a three-year period for a total price of $50,000,000. Acme reported the following progress in year one: First, we need to compute the completion percentage for the year. We do this by dividing the costs incurred in the year by the estimate of total project cost. We find that the project completion percentage is 25 percent by dividing $10,000,000 by $40,000,000. Now we can compute the revenue for the first year. Total costs incurred to date Percent complete = Estimate of total project cost $10,000,000 Percent complete = $40,000,000 = 25%

Acme Construction is constructing a building for Jones Foods over a three-year period for a total price of $50,000,000. Acme reported the following progress in year one: Construction revenue for year one is $12,500,000, which is 25 percent of the contract price of $50,000,000. Construction expense for the first year is the $10,000,000 of costs incurred. We subtract the $10,000,000 of expenses from the $12,500,000 of revenue to find Acme’s income of $2,500,000.

End of Chapter 6 End of Chapter 6.

Reporting and Interpreting Sales Revenue, Receivables, and Cash

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Reporting and Interpreting Sales Revenue, Receivables, and Cash

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