Video Transcript: Sales Revenue

Hello and welcome back. Now we're going to talk about sales revenues. The  seller of goods transfers them to buyers in exchange for cash or promise to pay  at a later date. This exchange is relatively simple business transaction. Sellers  make sales to create revenues. This inflow of assets in the form of cash or  accounts receivable results from selling goods to customers. Next, we describe  the more complete income statement actually prepared by accountants. The  merchandising company that we use to illustrate the income statement is Hamlin retail food store. This section explains how to record sales revenue, including  the effective of the trade discounts. Then we explain how to record two  deductions from sales revenue, sales discount and sales return on returns and  allowances, the amounts that remain in the net sales, the formula for  determining net sales. Okay, so you have your gross sale of $282,000 some  businesses will offer a sales discount. Usually, if you pay your bill within a  certain amount of time, they will issue a sales discount, and then the returns, the sales returns and allowances. Those are allowances for when, say, a clothing  industry or a food industry, as with our example, they return items. This is the  amount that's allowed for that so once you deduct the two items, the discounts  and the sales return allowances, you have a total your true revenue for that  particular period. This is a copy of an invoice, and I'll go back to it as I explain it.  In a sales transaction, the seller transfers the legal ownership of the goods to  the buyer. Usually, the physical delivery of the goods occurs at the same time as a sell of the goods a business document called an invoice, which is this, and we  will explain it here in more detail. It becomes the basis of that recording of  recording the sale. An invoice is a document prepared by the seller of  merchandise and sent to the buyer. The invoice contains details of the sale,  such as the number of units sold, the unit price, the total price, the bills, the  terms of the sale, and what type of manner of shipment. So we'll go back to and  as you can see, so you have the owner of the business, and should always have an invoice number, the date of the invoice, should always have a customer  number of some type, who you're selling it to. And the terms net 30 means it's  due in 30 days, and freight on board destination. It means that's when the  purchaser takes ownership, is when it reaches the final destination, until it  reaches that destination, the seller is still responsible. So that's what FOB  destination means. Date shipped is the date obviously you're going to ship it,  and who, who you ship the product with, and then the description of the product, model number, if you have it, whatever kind of identifying information you want  to include here and how much the price and then the grand total. A wholesale  company which supplies goods to retailers, prepares the invoice after the  shipping department notifies the accounting department that it has shipped the  goods to the retailer using the invoice as a source document, a wholesale  company records the revenue from the sale at the time of the sale for the  following reasons, the seller has passed legal title of the goods to the buyer, and

the goods are now the responsibility and property of the buyer. The seller has  established the selling price of the goods. They have completed this obligation.  It has exchanged the goods for another asset, such as cash or accounts  receivable, and the seller can determine the cost incurred in selling the goods.  Each time a company makes a sale, the company earns revenue. This revenue  increases a revenue account called sales recall from Unit Three that credits  increase revenues. Therefore the firm credits the sale account for the amount of  the sale. Usually, sales are for cash or on account. When a sell is for cash, the  company credits the sales account and debits cash. For example, we receive  $20,000 cash from the previous invoice, and then we record our sales as a  credit of $20,000 when it sells on account, it credits the sales account and debit  the accounts receivable. So accounts receivable is a promise to pay for $20,000 and we are going to recognize it as a as a revenue. Usually, a seller quotes the  gross selling price, also called the invoice price of goods to the buyer. However,  sometimes the seller quotes the list price of goods along with available trade  discounts. In this later situation, the buyer must calculate the gross selling price,  the list price, less all trade discounts of the gross selling price. Merchandising  companies that sell goods use the gross selling price as a credit to sales. A  trade discount is percentage deduction or discount from the specified list price  or catalog price of merchandise companies you trade use trade discounts to  reduce the cost of catalog publication. A seller can use a catalog for a longer  time by printing list prices in the catalog and giving separate discount sheets to  salespersons whenever prices change, they can grant quality a grant quantity  discounts, and they can allow quotation of different prices to various customers,  such as retailers and wholesalers, the seller's invoice may show trade discounts. However, sellers do not record trade discounts in their accounting records,  because the discounts are used only to calculate the gross selling price. Nor do  trade discounts appear on the books of the purchaser. To illustrate, assume an  invoice contains the following data. So you have a list price of 200 swimsuits at  $24 which grows us to $4,800 you're going to offer them a trade discount of 30% for a final gross selling price, which will be your invoice price of 3360. The seller  records a sell of the $3,360 the purchaser records a purchase of the $3,360 thus neither the seller nor the purchaser enters list prices and trade discounts on  their books. Sometimes the list price of a product is subject to several trade  discounts. This series of discounts is a chain discount. Chain discounts exist.  For example, when a wholesaler receives two trade discounts for services  performed, such as packaging and distributing. When more than one discount is given, the buyer applies each discount to the to the declining balance. Success.  Successfully. If a product has a list price of $100 and is subject to trade  discounts of 20% and 10% the gross selling price would be $100 minus the 2%  which would equal $80 and then the $80 minus the 10% which would be the $72 you could obtain the same result by multiplying the list price by the compliments 

of the trade discounts allowed. The complement of 20% is 80% because 20%  plus eight, 80% equals 100 to come from the completement of 10% is 90%  because 10 plus 90 is 100 that's the gross selling price, 100 times eight, 80%  times 90% gives you the $72.00. Two common deductions from gross sales are  sales discounts and sales returns and allowances. Sellers record these  deductions in the contra revenue accounts to the sales account. Contra  accounts have normal balances that are opposite to the balance of the account,  they reduce, for example, since the sales account normally has a credit balance, the sales and discount account and sales return and allowance account have  debit balances.