Net Sales quiz #1 Flashcards
Net Sales quiz #1
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What do the terms '3/10, net 45' mean in a sales transaction?
They mean the customer can take a 3% discount if payment is made within 10 days; otherwise, the full amount is due in 45 days. How is a sales discount recorded under the gross method when the customer pays within the discount period?
The full sale is recorded initially; when payment is received, cash is debited for the discounted amount, sales discounts (a contra revenue account) is debited for the discount, and accounts receivable is credited for the full amount. How is a sales discount recorded under the net method when the customer pays within the discount period?
The sale is recorded at the net amount (assuming the discount is taken); when payment is received, cash is debited and accounts receivable is credited for the net amount. What happens if a customer does not pay within the discount period under the gross method?
The customer pays the full amount; cash is debited and accounts receivable is credited for the full sale amount. What happens if a customer does not pay within the discount period under the net method?
Cash is debited for the full amount received, accounts receivable is credited for the net amount, and the difference is credited to sales discounts forfeited (a revenue account). What is a sales return and how is it recorded?
A sales return occurs when a customer returns goods; sales returns (a contra revenue account) is debited and accounts receivable is credited for the return amount. What is a sales allowance and how is it recorded?
A sales allowance is a reduction in price due to dissatisfaction, but the customer keeps the goods; sales allowances (a contra revenue account) is debited and accounts receivable is credited for the allowance amount. How do sales discounts, returns, and allowances affect net sales?
They are subtracted from gross sales revenue to calculate net sales. What is the formula for calculating net sales?
Net Sales = Gross Sales Revenue - Sales Discounts - Sales Returns - Sales Allowances. Why are sales discounts, returns, and allowances recorded in separate contra revenue accounts instead of directly reducing revenue?
Recording them separately provides better information for management about the reasons for reductions in revenue. What is the purpose of a contra revenue account?
A contra revenue account is used to track reductions in revenue, such as sales discounts, returns, and allowances, and has a debit balance. How does a sales return differ from a sales allowance?
A sales return involves the customer returning goods, while a sales allowance involves the customer keeping the goods but paying less. How does a sales discount differ from a sales allowance?
A sales discount is offered for early payment, while a sales allowance is a price reduction due to dissatisfaction with the goods. What is the impact of sales returns on accounts receivable?
Sales returns decrease accounts receivable because the customer no longer owes the company for the returned goods. What is the impact of sales allowances on accounts receivable?
Sales allowances decrease accounts receivable because the customer is allowed to pay less than originally invoiced. What is the impact of sales discounts on accounts receivable?
Sales discounts reduce the amount of cash received and the accounts receivable balance when the customer pays within the discount period. Why is it important to track sales discounts, returns, and allowances separately?
Tracking them separately helps identify issues such as product quality problems or customer payment behavior. What type of account is 'sales discounts' and what is its normal balance?
'Sales discounts' is a contra revenue account with a normal debit balance. What type of account is 'sales returns' and what is its normal balance?
'Sales returns' is a contra revenue account with a normal debit balance. What type of account is 'sales allowances' and what is its normal balance?
'Sales allowances' is a contra revenue account with a normal debit balance. How does the gross method differ from the net method in recording sales with discounts?
The gross method records the full sale amount initially and adjusts for discounts when payment is received; the net method records the sale at the discounted amount, assuming the discount will be taken. When using the gross method, what entry is made when a customer pays within the discount period?
Debit cash for the amount received, debit sales discounts for the discount, and credit accounts receivable for the full amount. When using the net method, what entry is made if the customer does not take the discount?
Debit cash for the full amount received, credit accounts receivable for the net amount, and credit sales discounts forfeited for the difference. What is the effect of sales returns and allowances on the income statement?
They reduce total revenue, resulting in lower net sales reported on the income statement. How do you calculate the amount of a sales discount?
Multiply the gross sale amount by the discount percentage. If a company sells $2,000 of goods with terms 3/10, net 45, and the customer pays within 10 days, how much cash does the company receive?
The company receives $1,940 ($2,000 minus 3% of $2,000, which is $60). If a company sells $2,000 of goods with terms 3/10, net 45, and the customer pays after 10 days, how much cash does the company receive?
The company receives the full $2,000. What is the journal entry for a sales return of $1,200 on account?
Debit sales returns for $1,200 and credit accounts receivable for $1,200. What is the journal entry for a sales allowance of $1,500 on account?
Debit sales allowances for $1,500 and credit accounts receivable for $1,500. What is the journal entry for a sale of $6,000 on account?
Debit accounts receivable for $6,000 and credit sales revenue for $6,000. What is the journal entry for receiving payment of $4,500 after a $1,500 sales allowance is granted on a $6,000 sale?
Debit cash for $4,500, debit sales allowances for $1,500, and credit accounts receivable for $6,000. How do sales discounts, returns, and allowances affect equity?
They decrease equity by reducing net revenue. What is the purpose of the sales discounts forfeited account in the net method?
It records additional revenue earned when customers do not take the early payment discount. Why might a company offer sales discounts to customers?
To encourage early payment and improve cash flow. What is the main benefit of using contra revenue accounts for discounts, returns, and allowances?
They provide detailed information about the reasons for reductions in gross sales. How does a sales return affect the company's assets?
It decreases accounts receivable, reducing total assets. How does a sales allowance affect the company's assets?
It decreases accounts receivable, reducing total assets. How does a sales discount affect the company's assets?
It reduces the amount of cash received, lowering total assets compared to the gross sale amount. What is the impact of net sales on the income statement?
Net sales provide a more accurate measure of actual revenue earned after accounting for discounts, returns, and allowances. How do you determine if a customer is eligible for a sales discount?
Check if payment is made within the specified discount period stated in the sales terms.
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