Question

XYZ Retail sells inventory to a customer on account for $2,000 on 2/20/20 (credit terms 2/10 n/30); the cost of the merchandise sold is $1,200. What effect (if any) does this transaction have on the assets, liabilities, and equity of XYZ Retail

Answer 1

First lets understand what the term 2/10 n/30 means:

It means that if the customer pays the due within 10 days of invoice date he will get a discount of 2% otherwise he has to pay in full within 30 days.

Before we understands the effect of transaction let us consider two secnario i.e Customer Pays the due within 10 days and other would be he pays the sum after 10 days.

Journal entry for scenario 1 i.e Due amount is paid with in 10 days.

1. Customer A/c Dr $2000

To Sales A/c $2000

(Being sale is booked)

2. Sales A/c Dr $2000

To Inventory A/c $1200

To Profit And Loss A/c $800

(Being profit booked before considering the discount )

3. Discount Allowed A/c Dr. $40

Cash Bank A/c Dr. $1960

To Customer A/c $2000

(Being amount received within 10 days an discount allowed @2%of $2000)

4. Profit And Loss A/c $40

To Discount Allowed A/c $40

(Being Discount allowed treated as expenses)

Effects:

First under Asset Inventory is reduced by $1200 and Sundry Receivable is increased by $2000 the difference of $800 is subset by Increasing the Profit And Loss A/c.

Secondly when cash is received within 10 days and discount is allowed asset side is increased by $1960 under cash and bank A/c and Sundry receivable is decreased by @2000 difference of $40 is subset by reducing the profit by $40

Ultimatelly

Asset:

Inventory -$1200

Sundry Asset $2000

Cash $1960

Sundry Asset -$2000

------------------------------------

Total Asset increased by $760

Equity:

Profit $800

Discount Exp -$40

---------------------------

Total Equity increased by $760

Liability no effect

Journal entry for scenario 1 i.e Due amount is not paid with in 10 days.

1. Customer A/c Dr $2000

To Sales A/c $2000

(Being sale is booked)

2. Sales A/c Dr $2000

To Inventory A/c $1200

To Profit And Loss A/c $800

(Being profit booked before considering the discount )

3. Cash Bank A/c Dr. $2000

To Customer A/c $2000

(Being amount received within 10 days an discount allowed @2%of $2000)

Effects:

First under Asset Inventory is reduced by $1200 and Sundry Receivable is increased by $2000 the difference of $800 is subset by Increasing the Profit And Loss A/c.

Secondly when cash is received after 10 days hence discount is not allowed so asset side is increased by $2000 under cash and bank A/c and Sundry receivable is decreased by @2000 hence no effect

Ultimatelly

Asset:

Inventory -$1200

Sundry Asset $2000

Cash $2000

Sundry Asset -$2000

------------------------------------

Total Asset increased by $800

Equity:

Profit $800

---------------------------

Total Equity increased by $800

Liability no effect