Question

1. A. 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? b. Please tell us about Sales Discounts. Why are they necessary? Does this account appear on the Financial Statements? c. How are sales to customers using credit cards recorded?

** No photo answers please as I can't see them! Thanks**

Answer 1

Hello there,

Think of Purchase Discount (Cash) as some sort of gain that comes to you. We often purchase purchase good from our suppliers who may give us some credit period to pay the dues. OK, now in case we pay them early than the stipulated period, he might offer you some discount that will be termed as purchase discount. Cash discounts are accounted in the financial statements.

Ok now there's a catch, if you talking about Trade dicount then they arent accounted in the books. What is trade discount? well it is a discount that the supplier offers for bulk purchases that is we might order a huge quantity of goods and for such a business that he is getting he might offer you a discount which is trade discount. i reiterate that trade discounts donot come up in financial statements. Then you might think where does that discount go? Well the answer is very simple, we would record the purchase net of discount, lets say for example, your listed price is $100. And the supplier offers you a trade discount of $2, you would record the Purchases at $100-$2 = $98 directly.

Now coming to sales discount.We are now on the other side of the table. You are now the seller. Now think of it as you usually sell about 100 units of your product daily. On one fine day, you get a order from a customer for 1000 units. Now would't you offer him a discount for such bulk sale that you are doing to him. Yes indeed sales discounts are sort of small loss/discount over the Listed price that you make on your Sales for a bulk sales order. Why are they needed ? Well every body would like to push in their products in the markets. Hence if you want to make your goods look cheaper than your competitor and thus increase the number of customers buying your product, you would definately want to put some disscount.

Sales using Credit Card.

Well first understand the transaction flow. A customer walks into your store, purchases the merchandise and offers you payment vide her credit card at your store counter. Well here goods are virtually sold for credit for a very short period of time. the bank acts as a mediator between you and customer who will take money from your customer and put it in your account. And so you think bank will do this for free ? Obviously no. THey'll charge you some commission. hence you would receive something less than your Bill amount that you made to your customer. We will treat this as your Credit Card Expense.

So the entry that you pass on sales via credit card is

Credit Card Accounts receivable-American/other A/c ---------------Dr 98

Credit Card Charges on Outward Sales A/c----------------------------Dr 2

To Sale to Customer-----------------------------------------------------Cr 100

On receipt from American Express

Cash / Bank A/C -----------------------------------------Dr 98

To Credit Card Accounts receivable-American/other A/c Cr 98

Hope i made it clear!

Happy learning!