Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 5 Accounting for Merchandise Operations 215

Net sales for Online Solutions is determined as follows:

Sales $720,185

Less: Sales returns and allowances $6,140

Less:Sales discounts 5,790 11,930

Net sales $708,255

Salesis the total amount charged customers for merchandise sold, including cash

sales and sales on account. Both sales returns and allowances and sales discounts are

subtracted in arriving at net sales.

Sales returns and allowancesare granted by the seller to customers for damaged

or defective merchandise. For example, rather than have a buyer return merchandise,

a seller may offer a $500 allowance to the customer as compensation for damaged mer-

chandise. Sales returns and allowances are recorded when the merchandise is returned

or when the allowance is granted by the seller.

Sales discountsare granted by the seller to customers for early payment of amounts

owed. For example, a seller may offer a customer a 2% discount on a sale of $10,000 if

the customer pays within 10 days. If the customer pays within the 10-day period, the

seller receives cash of $9,800, and the buyer receives a discount of $200 ($10,000 2%).

Sales discounts are recorded when the customer pays the bill.

Cost of merchandise sold is the cost of the merchandise sold to customers. To il-

lustrate the determination of the cost of merchandise sold, assume that Online Solutions

purchased $340,000 of merchandise during 2009. If the inventory at December 31, 2009,

the end of the year, is $59,700, the cost of the merchandise sold during 2009 is deter-

mined as shown below.

Purchases $340,000

Less merchandise inventory, December 31, 2009 59,700

Cost of merchandise sold $280,300

As we discussed in the preceding section, sellers may offer customers sales dis-

counts for early payment of their bills. Such discounts are referred to as purchases dis-

countsby the buyer. Purchase discounts reduce the cost of merchandise. A buyer may

return merchandise to the seller (a purchase return), or the buyer may receive a re-

duction in the initial price at which the merchandise was purchased (a purchase

allowance). Like purchase discounts, purchases returns and allowances reduce the cost

of merchandise purchased during a period. In addition, transportation costs paid by

the buyer for merchandise, referred to as transportation in, also increase the cost of mer-

chandise purchased.

To continue the illustration, assume that during 2010 Online Solutions purchased ad-

ditional merchandise of $521,980. It received credit for purchases returns and allowances

of $9,100, took purchases discounts of $2,525, and paid transportation costs of $17,400.

The purchases returns and allowances and the purchases discounts are deducted from

the total purchases to yield the net purchases. The transportation costs are added to the

net purchases to yield the cost of merchandise purchased, as shown below.

Purchases $521,980

Less: Purchases returns and allowances $9,100

Purchases discounts 2,525 11,625

Net purchases $510,355

Add transportation in 17,400

Cost of merchandise purchased $527,755

Q.Assume that sales are
$790,000, sales discounts
are $35,000, and net
sales are $680,000.
What are the sales returns
and allowances?

A.$75,000 ($790,000 
$35,000$680,000)

Q.Assume that purchases
are $480,000, purchases
returns and allowances are
$25,000, and purchases
discounts are $60,000.
What are the net
purchases?

A.$395,000
($480,000$25,000
$60,000)