After a company buys inventory, the next step is to sell the goods.
The amount a business earned from selling merchandise inventory is called sales revenue or sometimes just called sales.
A sale also creates an expense, costs of goods sold,
as the retailer gives up the asset, inventory.
Costs of Goods Sold is the cost of inventory that has been sold to the customers.
When recording transactions involving the sale of goods,
we have to make two journal entries.
The first is to record the revenue from the sale because goods are sold at their price.
The second is to record the cost from the sale because the goods we sold weren't free.
Let's look the same example we saw as a buyer of goods, only this time we'll record the transactions as the seller, RCA Records.
So RCA Records sells $3800 of vinyl records to Championship Vinyl. Let's assume the cost of those records was $2400.
So we would record a debit to accounts receivable and a credit to sales revenue
for the $3800 which was the price that the records sold for.
We would also record a debit to Cost of Goods Sold and a credit to inventory for $2400, which was the cost of the records.
The next thing we need to deal with was the return of the Taylor Swift records.
Sales returns and allowances are just the opposite transaction of the purchase returns
and allowances and the reversal of the sales journal entry with one exception.
Rather than debit sales revenue, and that's what we would do if we were reversing that journal entry entirely,
we would debit an account called sales returns and allowance.
This is a new account for us. It is a contra-revenue account.
If we were to debit sales revenue directly it may distort the revenue numbers and make it difficult for managers to track returns.
So when RCA Records receives the Taylor Swift records back, it debits sales returns and allowance,
and credits accounts receivable for $500 - again the price of the records.
It also debits inventory and credits Costs of Goods Sold for $200, which we're assuming is the cost of those,
when those records were returned to inventory stock.
Had RCA Records granted Championship Vinyl an allowance of $100 instead of the return,
then only the revenue journal entry is impacted because no records were being returned to inventory stock.
In this case we would debit sales returns and allowance and credit accounts receivable for $100.
There is no journal entry for Cost of Goods Sold in inventory when there is a sales allowance.
A sales discount is the opposite transaction of a purchase discount.
Like sales returns and allowance, rather than debit sales revenue,
we debit an account called sales discount, a contra-revenue account, when a buyer takes a payment discount.
If we were to debit sales revenue directly, it might distort the revenue numbers and make it difficult for managers to tract discounts.
So assume that Championship Vinyl pays the invoice on January 12, which is within the 10 day discount period.
How much are they going to pay RCA Records?
Well, let's answer that by figuring out how much RCA Records is owed.
When we look at T account for accounts receivable we can see that RCA Records is owed $3300.
Since Championship Vinyl is taking the discount, the amount received by RCA Records will be less than $3300.
A 2% reduction is a $66.00 discount meaning that RCA Records will receive $3234.
Notice that accounts receivable needs to be credited for $3300. If we were to credit for
the cash amount, then our records would show that we are still owed $66.00, when we are not.
So this journal entry is out of balance. We need a debit of $66.00, to make it balance.
Here you can see that that debit is to the sales discount account for $66.00
and now the journal entry balances.