We've learned some new accounts related to the sale of inventory. Let's recap those and add a couple new ones.
Sales revenue is the amount earned from selling goods - it's a revenue account.
Sales returns and allowances is the amount of buyer returns or allowed deductions from invoice price.
It is a contra-revenue account, which means it has a normal debit balance.
Sales discount is the reduction in the amount of cash received from a customer for early payment.
It is a contra-revenue account and it also has a normal debit balance.
Net sales revenue is a new term. It is the amount a company has earned on sales of goods
after returns, allowances and discounts have been deducted.
It is not an account, but rather a subtotal.
More on this in a minute.
Cost of Goods Sold is the cost of inventory sold to the customers. It's an expense account.
Gross profit is a new term as well.
It is the dollar amount goods are sold for, greater than the cost of goods.
It is not an account but rather a subtotal - again more on that in the minute.
Since net sales revenue and gross profit are subtotals, we need to learn how to calculate both.
Let's look at the data we used earlier from the sale of records from RCA Records to Championship Vinyl.
Recall that RCA Records sells $3800 of vinyl records on account to Championship Vinyl.
Let's assume that those records cost $2400.
RCA receives a $500 return of the Taylor Swift records. Let's assume that the cost of those records were $200.
RCA Records receives payment of 3234 from Championship Vinyl,
which was the 3300 owed less the $66.00 sales discount.
So that the T accounts looks like this for the revenue and contra-revenue accounts.
Sales revenue had a credit balance of $3800,
Sales returns and allowance has a debit balance of 500 and sales discount has a debit balance of $66.00.
If you're wondering where those numbers came from I encourage you to watch the video entitled perpectual seller.
Otherwise, the calculations are the same regardless of the source of the data.
Net sales revenue is calculated as sales revenue minus sales returns and allowances minus sales discount. It is the most important revenue figure
because it is the most meaningful to investors and creditors.
Here's an example. A few years ago I sold my Audi S4. It was a sweet car and as you can see from the photo pretty awesome looking.
So I figured I'd sell for $1,000,000 - I mean look at it. It's cool.
Unfortunately, no one else thought it was as cool as I did so I offered $8990 discount and sold it right away.
So which amount of revenue provides better information?
The $1,000,000 of sales revenue
or that $10,000 of net sales revenue
I think you can figure out, In fact, I liked that car so much I replaced it with these two, but that's another story.
Now that we know how to calculate net sales revenue, let's calculate gross profit. In order to calculate
gross profit, we need two first figure out the amount of Cost of Goods Sold.
When RCA Records made the initial sale, Cost of Goods Sold was debited for $2400, the cost of the records.
when the Taylor Swift records were
returned, Cost of Goods Sold was reduced by the cost of that inventory of $200.
So the balance in Costs of Goods Sold is $2200 debit balance.
Gross profit is the difference between net sales revenue and Costs of Goods Sold.
It represents the amount the goods were sold for greater than their cost
so RCA sold those vinyl records
to Championship Vinyl for $1034 more than they cost RCA Records.
Gross margin, which is sometimes called the gross profit percentage, is a ratio that shows how much of every sales dollars
is going to gross profit. This is very helpful for investors and creditors when they compare companies of different sizes.
Gross margin is calculated by taking the gross profit
in dollars and dividing it by the net sales revenue in dollars.
Gross margin is one of the most carefully watched measures of profitability
by internal and external use of the financial data. A small increase may signal an important rise
in income. Conversely, a small decrease may signal trouble.
For RCA Records, the gross margin is 32% meaning that 32¢ out of every sales dollar is going to gross margin.
You'll learn more about how gross margin impacts net income in an upcoming video entitled multi-step income statement.