lecture recording on 03 March 2025 at 13.40.33 PM

Invoice Payment and Discount Structure

• Invoice Payment Terms

  • 60 days to pay the invoice.

  • Pay within 10 days for a 2% discount.

• Financial Implication of Paying Early

  • Earning 2% return in a 50-day window is unlikely compared to the discount offered.

Business Process Overview

• Inventory Cycle

  • Inventory is put on a shelf until purchased.

  • Payment processing may take an additional month after billing.

  • Revenue is recognized only when the product is picked up by the customer (satisfying performance obligation).

Revenue Recognition & Accounting Methods

• Sales Discounts Accounting

  • Two main approaches discussed: Gross Basis and Net Basis.

  • Gross Basis

    • Assumes no discounts are taken until they are taken.

    • Revenue recognized at full sales price.

  • Net Basis

    • Assumes all discounts will be taken.

    • Revenue recognized at discounted sales price.

• Example Entry for Sale

  • Sale of $3,000 with terms 2/10, n/60 to Chester Company.

    • Accounts Receivable debited and Sales credited for $3,000 on the gross basis.

    • Inventory credited for the cost of goods sold if on perpetual method.

Example of Payment and Discount Recognition

• Payment Received on Time

  • If payment received within 10 days:

    • Cash debited for discounted amount ($2940); Accounts Receivable credited for full amount ($3000);

    • Sales Discount debited to balance out the entry ($60).

• Payment Received Late

  • If payment received after discount period:

    • Cash debited for $3000; Accounts Receivable credited for $3000.

Adjusting Entries for Discounts

• End-of-Year Adjustments

  • Necessary if some customers will likely take discounts after period end.

  • Adjusting entry needed to reflect anticipated discounts taken.

    • Debit Sales Discounts and credit Allowance for Sales Discounts.

• Purpose

  • Aligns revenue and contra revenues within the same reporting period.

Impact of Adjusting Entries

• Allowances for Discounts

  • Allowance for Sales Discounts operates as a contra revenue account, providing detail for investors and analysts.

  • Important for maintaining clean financial statements and adhering to matching principles.

Additional Revenue Recognition Concepts

• Bad Debt Estimates

  • Must estimate bad debts based on historical data, reflected in the Allowance for Doubtful Accounts.

  • Bad debt expense recorded to maintain accurate net receivables on balance sheet.

Return Accounting Entries

• Normal Entry for Returns

  • Sales Returns and Allowances debited, Cash or Accounts Receivable credited.

• Estimating Returns

  • At year-end, estimate returns to recognize potential return liabilities.

    • Debit Sales Returns and Allowances, credit Sales Refund Payable for estimated returns.

• Specific Return Entry

  • Debit a specific Sales Refund Payable account when a return occurs and credit Cash for the refund issued.