Question

1.  Please tell us about Purchases Discounts and Purchases Returns and Allowances. Please indicate the purpose of these accounts. Do they appear on the Financial Statements?

2. Please tell us about Sales Discounts. Why are they necessary? Does this account appear on the Financial Statements?

3. How are sales to customers using credit cards recorded?

4. Please create an example of an Income Statement for a merchandising business.

Answer 1

Answer 1:

Meaning of Purchase discount & its its purpose:-

1. Purchase discount is discount offereed by Supplier to the customer.
2. It is cash discount or early payment discount
3. It attracts customer to purchase marchndise & make early payment for the purchases
4. If the customer pays the amount within stipulated period ,purchase discount may be allowed by supplier.
5. Trade discount is also offered by the supplier based on customer's status or volume of purchases.
6. Cash discounts or early payment disounts are recorded in the books of accounts
7. Trade discounts are not recorded in the books of accounts.
8. In case of Trade discounts,purchases will be recorded Net of trade discounts.It is not recorded in the books of accounts
9. In case of Cash disounts or early payment discount, Purchases are recorded Gross i.e without discount.Upon payment from the,discount received will be accounted in the books of accounts.
10. Journal Entry for Credit purchases & 2% discout for payment with in 10 days
11. Purchase Entry,

Date	Account Titles	Debit	Credit
12-Jan	Purchases	$1,000
	Account Payable		$1,000

12.Journal Entry for Purchase discount

Date	Account Titles	Debit	Credit
15-Jan	Account Payable	$1,000
	Purchase Discount		$20
	Cash		$980

Presentation in Finanacial Statement:

1. Purchases will be shown in the Income statement .Purchase discounts will be shown as deduction from the Purchases in the Income statement.
2. Net payable amount in the Account payable will be shown in th Balance sheet.

Purchase Returns & Allowances:-

1. Customer returns the goods purchased by him from the supplier due to some reasons like, inferior quality,not satisfied with product ,etc
2. Possible reasons for return can be customer biught more than needed,Customer did not purchase right product,delivery of wrong goods or damaged goods by supplier.
3. Purchase return is deducted from the Purchases of the comapny.
4. Allowance is reduction in the price from the seller to the customer.
5. Allowances are given when the goods received are unsatisfactory to the customer, but the customer chooses to keep the goods rather than return them.
6. Journal Entry for Purchases

Date	Account Titles	Debit	Credit
15-Jan	Purchases	$1,000
	Account Payable		$1,000

5. Journal Entry for Purchase Returns & Allowances

Date	Account Titles	Debit	Credit
18-Jan	Account Payable	$100
	Purchase Return & Allowances		$100

Presentation in Finanacial Statement:

1. Purchases will be shown in the Income statement Purchase return & allowances will be deducted from the purchases in the Income statement.

Answer 2: Sales Discount, Its Neccesity & its presentation in Fiancial Statement,

1. Sales Discount is a discount offered to the customer
2. It is reduction in the price of goods or service offered by seller for early payment of invoice by the customer.
3. Sales Discount is given if the customer pays the bill amount within the stipulated period.
4. If the customer pays the amount within stipulated period,Seller woul record the following entry,

1. Date	Account Titles	Debit	Credit
   15-Jan	Sales Discount	$100
   	Cash	$900
   	Account Receivable		$1000

5. Sales Discount will be shown in Income statement & offsets the Gross sales resulting in Net sales i.e Gross sales - Sales Discount

Answer 3:Recording of Sales to customer through Credit card:

1. Credit card sales means customer buys products & pays for the same through a card instead of Cash
2. Seller would receive cash for such credit card sales
3. Credit card issuer comapanies usually charge fee from 2% to 6% on Sale Price
4. Fees are dedcuted by the card issuer comapnies while making payment to the seller.
5. Example: Credit card Sales : $1000,Credit card fees: 3% of sales
6. Journal Entry would be

Date	Account Titles	Debit	Credit
15-Jan	Cash	$970
	Credit card Expenses	$30
	Sales		$1000

Answer 4: Example of Income statement for Maechandising business.Example: XYZ company sold goods worth $10,000 to PQR company on credit 3/10,n/3o terms.XYZ co purchases goods from ABC co worth $ 6300 on credit terms 5/10 terms,n/30 terms.PQR co return goods to XYZ co worth $350. XYZ co returns goods worth $ 560 to ABC co.Prepare Income statement of XYZ co

Particulars	Amount $	Amount $
Revenue	$10,000
Less: Sales Returns	-$350
Net Revenue		$9350
Cost of Sales		$5,740
Gross Profit		$3,610
Administrative Expenses		$360
Distribution Expesnes		$110
Emplyee Benefit Expenses		$1000
Depreciation & Amortization Expenses		$55
Profit Before Taxes		$2085
Income Taxes @30%		$625
Net profit after tax		$1460

Cost of Sales

Purchases :$ 6,300

Less: Purchase Return: $560

Net purchases:$5,740

Please feel free to reach or comment back if you need further clarity or something is missing.