Accounting ACCT 2610 Chapter Notes - Chapter 6: Gross Margin, Direct Deposit, Promissory Note
• gross profit (gross margin, gross profit margin) = net sales revenue – cost of
sales
• revenue principle requires that revenues be recorded when they are earned
(delivery has occurred or services have been rendered, there is persuasive
evidence of an arrangement for customer payment, the price is fixed or
determinable, and collection is reasonably assured)
o for sellers of goods, these criteria are most often met and sales revenue is
recorded when title and risks of ownership transfer to the buyer
▪ the point at which title (ownership) changes hands is determined
by the shipping terms in the sales contract
• when goods are shipped FOB (free on board) shipping
point, title changes hands at shipment, and the buyer
normally pays for shipping
o revenues are normally recognized at shipment
o most companies recognize revenue at shipment
• when goods are shipped FOB destination, title changes
hands on delivery, and the seller normally pays for shipping
o revenues are usually recognized at delivery
o service companies most often record sales revenue when they have
provided services to the buyer
• the appropriate amount of revenue to record is the cash equivalent sales price
• companies use different methods to motivate customers to buy products and
pay for their purchases
▪ all these affect net sales revenue computing
o allowed to use credit cards to pay for purchases
o provide business customers direct credit and discounts for early payment
o allowing returns from all customers under certain circumstances
• credit card sales to consumers
o credit card discount = the fee charged by the credit card company for
services, a contra-revenue
▪ credit sales revenue ()
• credit card discounts () = total credit card sales x credit
card discount
▪ sales revenue – credit card discounts = net sales (reported on the
income statement)
• sales discounts to businesses
o some sales to businesses are credit sales on open account; there is no
formal written promissory note or credit card
o credit terms printed on invoice as an early payment incentive
▪ early payment incentive
• 2/10,n/30
• 2 = discount percentage
• 10 = number of days in discount period
• n = net (total sales – returns)
• 30 = maximum credit period
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o sales discount (cash discount) = a cash discount offered to encourage
prompt payment of an account receivable, a contra revenue → credit
terms
▪ credit sales revenue ()
• sales discounts () = discount percentage x sales
▪ sales revenue – sales discounts = net sales
o if payment is made after the discount period, the sales discount doesn’t
apply
• sales returns and allowances
o sales returns and allowances = a reduction of sales revenue for return
of or allowances for unsatisfactory goods, a contra-revenue
▪ credit sales revenue ()
• sales returns and allowances () = (goods returned/total #
of goods purchased) x sales
• reporting net sales
o reported on the income statement
▪ credit sales revenue (R)
• - debit credit card discounts (XR)
• - debit sales discounts ( XR)
• - debit sales returns and allowances (XR)
▪ = net sales (reported on the income statement)
• gross profit percentage = measures a company’s ability to charge premium
prices and produce goods and services at low cost
o a higher gross profit results in higher net income
o gross profit/net sales
• classifying receivables
o account receivable (trade receivables, receivables) = open accounts
owed to the business by trade customers
▪ created by a credit sale on an open account
o note receivable = written promises that require another party to pay the
business under specific conditions (amount, time, interest)
▪ promise in writing to pay a specified amount of money, the
principal, and a specified amount of interest at a future date
o receivables may be classified as trade or nontrade recievables
▪ trade receivable = created in the normal course of business when
a sale of merchandise or services on credit occurs
▪ nontrade receivable = created from transactions other than the
normal sale of merchandise or services
o in a classified balance sheet, receivables are classified as current (short-
term) or non-current (long-term) depending on when the cash is
expected to be collected
• accounting for bad debts
o when a company extends credit to noncommercial customers, it knows
that some of these customers will not pay their debts
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