Accounting and Finance Foundations

Unit 10

Accounting and Finance Foundations Unit 10: Credit 759

Credit

Chapter 22

Lesson 22.4

Student Guide

Impact of Credit on Financial Decisions (cont’d)

In Lesson 22.1, you learned about trade discounts. When Deals sells to someone on credit, the terms of

the sale are printed on the sales document and invoice that is sent to the customer. The record of the sale

is kept in an accounts receivable ledger. In some cases, a sales discount or a cash discount is offered

to encourage prompt payment. Deals offers standard credit terms of 2/10, n/30. If cash payment is not

received within that 10-day discount period, the full sales price is due within 30 days.

Companies commonly record sales discounts given to customers by subtracting the discounts from sales

if payments are made during the discount period.

Example:

A credit sale of $1,000 is recorded with terms 2/10, n/30. What is the discount’s effect on the net sales?

Solution:

Sales $1,000

Less: Sales Discount (1,000 X 2%) - 20

Net Sales (reported on the income statement) $980

Retailers and consumers alike have the right to return unsatisfactory or damaged merchandise and receive

a refund or an adjustment to the bill. Such returns are tracked in a separate account called Sales Returns

and Allowances and must be deducted from gross sales when determining net sales. This account helps

managers and business owners track customer service and the amount of returns.

Example:

Assume Deals sells 40 pairs of shutters at $50 per pair to a customer on account for $2,000. When the

customer received the shutters, 10 pairs were damaged and had to be returned to Deals. Compute net

sales.

Solution:

Sales $2,000

Less: Sales Returns And Allowances (10 pairs x $50) - 500

Net Sales (reported on the income statement) $1,500

(On the income statement, cost of goods sold, as it relates to the 10 pairs of shutters, would also be reduced.)

Did you know that the only time in U.S. history when the national debt was completely paid off

was in 1835, while Andrew Jackson was president? America didn’t remain debt-free for long,

though. Just three years later, in 1838, the debt ballooned to $3.3 million, and it has not been

paid off in full since.