Question

1. How are sales discounts computed? How are they recorded? Why are discounts offered?

2. What type of account is Sales, Returns and Allowances and how is it used?

3. What is the accounts receivable subsidiary ledger and how is it used? Why does a company keep a subsidiary ledger? Explain how a journal entry ends up in that subsidiary ledger?

4. What account is used to show that a company has collected sales tax but has not yet paid it to the government? What type of account is it?

Answer 1

1. Sales discount refers to the reduction in the amount due from a customer as a result of early payment. It is treated as a deduction from sales.

Example - sales discount = 10% on sales; sales= 100000

therefore, sales discount = 100000* 10/100 = 10000

Journal entry for sales discount

Cash a/c dr.

Sales discount a/c dr.

To Accounts Receivable a/c

Discounts are offered for -

• to enhance customer relationship
• attainment of sales goals
• old stocks are cleared
• better brand awareness

2. Sales return and allowance account is considered as contra-revenue account, which normally has a debit balance. In the sales revenue section of an income statement the sales return and allowancw is subtracted from sales because these accounts have the opposite effect on net income.

Recording sales return and allowance in a separate contra-revenue account allows management to monitor returns and allowance as percentage of overall sales.

3. An accounts receivable subsidiary ledger is an accounting ledger that shows the transactions and payment history of each customer to whom the business extends the credit. The balance in each customer account is periodically reconciled with the accounts receivable balance in the general ledger to ensure accuracy. The subsidiary ledger is also commonly referred to as the subledger or subaccount.

By having the details of the accounts receivable activity in a subsidiary ledger, employees in a company's credit department of a company can access the credit sales information without having access to any information in the general ledger.

How journal entries end up in subsidiary ledger-

Record all transactions using the sales jornal, purchases jornal, cash receipts journal, cash receipts jornal, cash disbusrsements journal, and the general journal and post to the accounts receivable and accounts payable subsidiary ledgers. Then prepare shedule of accounts receivable and a schedule of accounts payable.

At the end of the month, each of the previous journal totals are posted to the appropriate account in the general ledger, and any individual account postings.At the end accounts receivable must be equal to the accounts payable. If the numbers did not match, we would find out where the error was and then fix it.

4. Sales tax payable account is used to show that a company has collected sales tax but has not yet paid it to the government.

Sales tax payable account is a liability account that normally has a credit balance. This account is credited when sales tax is collected from customers and is debited when collected amount of tax is remitted to the relevant tax authorities.