FINANCIAL ACCOUNTING NOTES Example

RECORDING TRANSACTIONS On 01/01/2020 XYZ sold goods worth K5, 000 on credit
On 31/01/2020 XYZ received payment of K5, 000
1. Accounting for Sales
1.2. Accounting for sales discount
Sales can be entered into the business accounting system in several different ways. The
need for reports, and the capabilities of the cash register or point of sale system will Accounting for Sales Discounts refers to the financial recording of reducing the
determine how much detail will be entered into the accounting system. sales price due to early payment. The sales discounts are directly deducted from

All sales transactions have two parts, representing the things to be paid for on one half, and the gross sales at recording in the income statement. In other words, the value of
the means of payment on the other half. sales recorded in the income statement is the net of any sales discount – cash or
1.1. Recording sales transactions trade discount.
Sales can be done either on cash or on credit. The sales discount is calculated as a particular percentage of the sales price and
i. On cash can be in the form of cash or trade discount on sales, discount allowed, or
DR CR settlement discount. Trade discounts are those sales price reductions offered to
Cash xxxx
Sales revenue xxx wholesalers when they purchase in bulk, while cash discount refers to a reduction
in sales price offered to customers due to early payment.
Example
On 01/01/2020 XYZ sold goods worth K5, 000 on cash
On date of sale

ii. On credit

On date of sale
DR CR On date of payment with discount allowed
Accounts receivable xxxx
Sales revenue xxx

On date of receiving funds

DR CR
Cash xxxx
Accounts receivable xxx

Prepared by: Mr. Vincent Sakala

 Example #1 Example
Let us take the example of SDF Inc., which sold merchandise to ASD Inc. on ABC Co sold its merchandise inventory to its customer on 01 November 20X1 for
January 31, 2019, at a total sales price of $50,000. ASD Inc. has been given 30 $2,000 with the credit term of 2/10, n/30.
days to make the payment. But if the customer pays the amount within ten days, it
will be offered a discount of 2% on the sales price. Prepare the journal entries for Accounting for Sales Discounts on Income Statement
recording the transaction if: The accounting of sales discounts on the income statement is fairly simple. The
1. ASD Inc. makes the payment on February 20, 2019, i.e., after the discount period’s amount of sales discounts is deducted from the number of gross sales or revenue
expiry. recognized. On the income statement, it is reported as a separate line item as “net
2. ASD Inc. makes the payment on February 08, 2019, i.e., within the discount period. sales” on the income statement. The net sales refer to the actual amount of
a) In this case, the journal entries would be as follows: revenue earned during the period. In the income statement, it is recorded, as
shown below:

1.3. Accounting for sales returns

A sales return is recorded commonly under "Sales Returns and Allowances". This
account is presented in the income statement as a deduction from "Sales" (or
Gross Sales). Sales returns involve actual physical return of the merchandise with
a corresponding refund or credit to the customer's account.

For example, if a business sells goods to the value of 2,000 on 2/10, n/30 terms, it Sales returns are recorded at the price at which the items were previously sold. A
means that the full amount is due within 30 days but a 2% sales discount can be sales return against a sale on account (on credit) is recorded as:
taken if payment is made within 10 days.

Prepared by: Mr. Vincent Sakala

 If the customer already paid the amount and the return involves a refund, the In summary, sales returns are recorded at the amount the item was previously
journal entry would be: sold. It is recorded by debiting "Sales Returns and Allowances". This account
is treated as a deduction from "Sales" in the financial statements.

2. Accounting for purchases

Merchandise is the term used to refer to any goods purchased for the purpose of resale in
the ordinary course of business. The term is regularly used in trading organizations.
Example
Merchandise are purchased either for cash or on account.
1. MAHOGA Industries sold 1,000 units of a specific wood product to BLADE
Industries for $6 per unit, on account. This is properly recorded with a debit When Merchandise Are Purchased for cash

to "Accounts Receivable" and credit to "Sales". Later, BLADE returned 100

units because they were defective. In the books of MAHOGA, the sales return
would be recorded by debiting "Sales Returns and Allowances" and crediting
the customer's account for $600 (100 units x $6).

When Merchandise Are Purchased on Account

2. CAMAS Company sold a coat to Ms. Dawson for $50. The next day, Ms.
Dawson returned the item after discovering defects in its inner pockets. No If merchandise are purchased on account, the accounts involved in the transaction are
the purchases account and accounts payable account. The purchases account is debited
same item is available as of that time. The business decided to refund the and the accounts payable account is credited.
amount paid by Ms. Dawson. The journal entry for the return would be:

Prepared by: Mr. Vincent Sakala

 In the second entry, we debit the cash account and the credit accounts receivable
account. This entry is made when a refund is received from the supplier for the returned
merchandise.

Example

On 1 April 2016, Y Merchants purchased merchandise for $2,500 in cash from Z Traders.
Upon delivery, Y Merchants found serious defects in the items, meaning that they could not
be sold to customers. Y Merchants returned the merchandise to Z Traders on the same day.
On 2 April 2016, Z Traders returned the full amount in cash to Y Merchants.
Returns Outward: Required: Make a journal entry in the books of Y Merchants that records:

Merchandise that is returned to suppliers is known as returns outward. 1. The purchase of merchandise from Z Traders
If merchandise purchased are not received according to specifications or if they are 2. The returns outward
defective, buyer can return them to the seller or ask the seller for an allowance (e.g., 3. The receipt of refund of cash for goods returned to Z Traders
reduction in price).
To record such returns and allowances, the purchase returns and allowances account is
used in the buyer’s books.
The journal entries for the return of merchandise purchased for cash and merchandise
purchased on account are different.

Return of Merchandise Purchased for Cash

When merchandise purchased for cash are returned to the supplier, it is necessary to make
two journal entries.

In the first entry, we debit the accounts receivable account and credit the purchase
returns and allowances account. This entry is made to recognize the return of
merchandise.

Prepared by: Mr. Vincent Sakala

Return of Merchandise Purchased on Account

When merchandise purchased using an account are returned to a supplier, it is necessary

to debit the accounts payable account and credit the purchase returns and allowances
account.
Example
Summary of the Drawing Account Entry
On 1 April 2016, Y Merchants purchased merchandise for $2,500 on account from Z Traders.
A Drawing Account is an account in the books of the business which is used to record the
Upon delivery, Y Merchants found that the merchandise was defective and, therefore, could
not sell it to customers. Y Merchants returned the merchandise to Z Traders on the same transactions involving the withdrawal of something by the owner of the business who has his
day.
capital invested in the business, generally proprietorship or partnership business.
Required: How would you journalize the above transactions in the books of Y Merchants?  Its a contra owner’s equity account to an associated owner’s equity account.
 It is used to record the transaction of an owner withdrawing cash or other assets
from its proprietorship enterprise for personal use.
 It is temporary in nature, which is closed at the end of the fiscal year and starts
with zero balance to record the owner’s withdrawals in the next fiscal year.
 It is closed at the end of the fiscal year by transferring the balance from the
drawing account to the owners’ equity capital account.
 It’s useful in keeping track of distributions made to owners in a partnership
business, thus helping avoid any disputes between business partners

Drawing Accounting

The word drawings refer to a withdrawal of cash or other assets from the
proprietorship/partnership business by the Owner/Promoter of the business/enterprise for
personal use. Any such withdrawals made by the owner lead to a reduction in the owner’s
equity invested in the Enterprise

Prepared by: Mr. Vincent Sakala