Task Team of FUNDAMENTAL ACCOUNTING School of Business Sun Yat-sen University Sales discounts It is common for businesses to sell their merchandise on account. Accordin ccounting, sales revenue is recorded at the point of sale. This means a business typically recognizes sales revenue prior to collecting cash; therefore, it may later need to make adjustments that are deducted from gross sales A sales discount is a cash discount taken by customers against an amount owed to the seller Since at the time of sale it is not known if the customer will take advantage of a cash discount, sales discounts are typically recorded when payment is received, as follows Sales discount Accounts receivable 10 The sales discount account is a contra revenue account -an offset to the sales account Gross Profit Accurate gross profit figures are an important tool for managers to assess the firms erformance. For example, it is common for businesses to calculate the gross profit percentage (gross profit net sales)and to compare this percentage with previous periods and with that of other firms. Net income for a merchandising operation can be calculated from gross profit as follows. Net sales=Sales- Sales returns and allowances-Sales discounts Gross profit=Net sales-Cost of goods sold Net income (loss)=Gross profit-Operating expenses Shrinkage Inventory losses that occur as a result of theft or deterioration are known as inven shrinkage Shrinkage is measured differently under the perpetual and periodic inventory systems Y Under the perpetual inventory system, shrinkage is calculated by comparing a physical count with recorded quantities t Under the periodic inventory system, only the cost of goods on hand and the cost of goods old are calculated and a direct measure of shrinkage is not provided. The cost of goods sold figure includes the actual cost of goods sold plus the cost of goods stolen or destroyed Summary of merchandising cost flows Regardless of whether a perpetual or periodic inventory system is in place, the transactions affecting Cost of goods sold on the income statement and Merchandise inventory on the balance sheet are identical. Under systems, the ending merchandise inventory of one accounting period is the beginning handise inventory of the next period. These events can be summarized through the following equations, which apply under either a perpetual or periodic nventory systemTask Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 5 Sales discounts It is common for businesses to sell their merchandise on account. According to accrual accounting, sales revenue is recorded at the point of sale. This means a business typically recognizes sales revenue prior to collecting cash; therefore, it may later need to make adjustments that are deducted from gross sales. A sales discount is a cash discount taken by customers against an amount owed to the seller. Since at the time of sale it is not known if the customer will take advantage of a cash discount, sales discounts are typically recorded when payment is received, as follows: Cash 98 Sales discount 2 Accounts receivable 100 The sales discount account is a contra revenue account — an offset to the Sales account. Gross Profit Accurate gross profit figures are an important tool for managers to assess the firm’s performance. For example, it is common for businesses to calculate the gross profit percentage (gross profit  net sales) and to compare this percentage with previous periods and with that of other firms. Net income for a merchandising operation can be calculated from gross profit as follows: Net sales=Sales – Sales returns and allowances – Sales discounts Gross profit=Net sales – Cost of goods sold Net income (loss) =Gross profit – Operating expenses Shrinkage Inventory losses that occur as a result of theft or deterioration are known as inventory shrinkage. Shrinkage is measured differently under the perpetual and periodic inventory systems.  Under the perpetual inventory system, shrinkage is calculated by comparing a physical count with recorded quantities.  Under the periodic inventory system, only the cost of goods on hand and the cost of goods sold are calculated and a direct measure of shrinkage is not provided. The cost of goods sold figure includes the actual cost of goods sold plus the cost of goods stolen or destroyed. Summary of merchandising cost flows Regardless of whether a perpetual or periodic inventory system is in place, the transactions affecting Cost of goods sold on the income statement and Merchandise inventory on the balance sheet are identical. Under both systems, the ending merchandise inventory of one accounting period is the beginning merchandise inventory of the next period. These events can be summarized through the following equations, which apply under either a perpetual or periodic inventory system: