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Sales Revenue

In bookkeeping, accounting, and finance, sales are a subset of revenue that is garnered from the sale of goods or merchandise during the normal course of business. Sales is reported on the income statement in the operating income section (the top section). Gross sales is equal to the total revenue earned from the sale of goods or merchandise. Net sales is equal to groww sales, less contra revenue accounts sales discounts, and customer returns and allowances. On the income statement, gross profit is then shown as net sales less the cost of goods sold


Under accrual accounting, we recognize sales revenue when the customer actually receives the goods, even if no money changes hands. This is because of teh revenue recogntion principle. If the customer doesn't pay cash at the time they receive the goods, we create an accounts receivable account for the customer, or we might use a note receivable. 

Sales Discounts

A sales discount is a small credit to a customers account that a seller will offer in exchange for an early payment for a credit sale by a customer. Sales discounts are recorded in what is called a contra revenue account, that is, a revenue account that has a normal debit balance (as opposed to a normal credit balance), which offsets other revenue accounts. 

Invoices typically include credit terms which tell the customer when they must pay, and how much of a discount they will receive if they pay early. A credit term commonly seen is 2/10, n/30; read as 'two-ten, net-thirty.' This means that if the customer pays their invoice within ten days, they will receive a 2% discount; they must pay their account in full within 30 days.

Sales Returns and Allowances

Sales returns occur when a customer has the right-of-return for a good and exercises this right. Sales allowances are discounts given to customers that are unhappy with a purchase to incentivize them not to return it. Although technically two different items, sales returns and sales allowances are typically recorded in the same account. 

Like sales discounts, the sales returns and allowances is a contra revenue account.

Estimating Sales Discounts and Sales Returns and Allowances

The matching principle requires that expenses be recorded in the same period in which the revenue they helped earn is recognized. The amount of mismatched returns and allowances is usually not material as long as the items are handled consistently from year to year; as a result, it is usually acceptable to simply report all sales returns and allowances that were made during the period, even if they were not related to the current period's sales. However, in some cases the company might have a few special large orders near the end of there accounting period. If the sales returns and allowances related to these sales are material, sales returns and allowances should be estimated and recognized in the period of the sale.

For example, ABC Co. combatted sluggish sales in December with more agressive selling and a looser credit policy. In January, they have $250,000 in consumer receivables outstanding, and estimate that 5% of these will be returned. Before preparing the financial statements for December, and adjusting entry would be made as follows:

The allowance for sales returns and allowances account would be a contra asset account similar to the allowance for doubtful accounts. Allowance for sales returns and allowances is presented on the balance sheet and offsets accounts receivable. 

Questions Related to Revenue Recognition

Questions Answered (a) Define and describe each of the following methods of revenue recognition, and indicate whether each is in accordance with generally accepted accounting principles. - Point of sale, - Completion-of-production, - Percentage-of-completion. - Installment-sales. (b) Calculate the revenue to be recog

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