Tanauan Institute, Inc.

– Senior High School Department

TANAUAN INSTITUTE, INC.

Senior High School Department

Modified Learning Scheme: Workbook

Fundamentals of Accountancy, Business and Management 2
1st Semester, S.Y. 2020-2021
Subject Teacher: ____________________

Name: ___________________________________ Score: ________________

Section: __________________________________ Date: _________________

Topic Session

Recording Net Sales Chapter 7

Objectives of the Lesson

At the end of the lesson, the student should be able to:
1. Discuss net sales.
2. Analyse and journalize transactions that involve sales.
3. Analyse and journalize transactions that involve sales discounts.
4. Analyse and journalize transactions that involve sales return and
allowances.
5. Analyse and journalize transactions that involve Freight Out.

Values Integration
Perseverance. The attitude that no matter how difficult an issue or a
problem maybe one will still continue until he or she succeeds. The lesson
that will be discussed involves analytical thinking which will require the
perseverance of the students in order to learn it.

Vocabulary

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Discussion
Net Sales is the first part of the merchandising income statement as
presented below:
Theodore Calaguas Traders
Partial Income Statement
For the Year Ended Dec. 31, 2016

Net Sales
Gross Sales P2,463,500
Less: Sales Returns and Allowances P27,500
Sales Discounts 42,750 70,250
Net Sales P2,393,250
Figure 6.1

Gross Sales
Under accrual accounting, revenues from the sale of merchandise are considered to be
earned in the accounting period in which the title (ownership) of goods passes – usually
at the point of delivery – from the seller to the buyer.
Gross sales consist of total sales for Cash and On Credit during the accounting period.
Although cash for the sale is uncollected, the revenue is recognized as earned at the
time of the sale. For this reason, there is likely to be a difference between net sales and
cash collected from those sales in a given period.
As an income account, the sales account is credited whenever sales account or cash
sales are made. Only sales of merchandise held for resale are recorded in the sales
account. If a merchandising firm sold one of its delivery trucks, the credit would be
made to the delivery equipment account, not to sales account.
The journal entry to record sale of merchandise for cash is as follows:
Sept.16 Cash 25,000
Sales 25,000
To record sale of merchandise for cash.

If the sale of merchandise is made on credit, the entry will be:

Sept.16 Accounts Receivable 25,000
Sales 25,000
To record sale of merchandise on credit.

Sales Discounts
Assume that T. Calaguas Traders sold merchandise on Sept. 20 for P3,000; terms 2/10,
n/60. At the time of sale, the entry is:

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Sept.20 Accounts Receivable 3,000

Sales 3,000
To record sales on credit; terms 2/10, n/60.

The customer may take advantage of the sales discount any time on or before Sept. 30,
which is 10 days after the date of invoice. If the client paid on Sept. 30, the entry is:
Sept.30 Cash 2,940
Sales Discounts 60
Accounts Receivable 3,000
To record collection on the Sept.20
Sale, discounts taken.

IMPORTANT NOTE: The terms of customer credit e.g. 2/10, n/60 – this means that if the customers pay
within 10 days, he/she will receive a 2% discount hence the term “2/10” and the credit must be paid within
60 days hence the term n/60. Therefore when one see this in a credit transaction, ‘2/10, n/60’ this means
a credit that have 2% discount if paid within 10 days and must be paid within 60 days.

At the end of the accounting period, the sales discounts account has accumulated all
the sales discounts for the period. The account is considered a contra-income account
and deducted from gross sales in the income statement (see figure 6.1).
Sales Return and Allowances
Buyers may be dissatisfied with the merchandise received either because the goods are
damaged or defective, of inferior quality or not in accordance with their specifications. In
such cases, the buyer may return the goods to the seller for the credit if the sale was
made on account or for cash refund if the sale was for cash.
Alternatively, the seller may just grant an allowance or deduction from the selling price.
A high sales return and allowances figure is not commendable because it may signal
poor quality of goods and thus may result to dissatisfied customers.
Each return or allowance is recorded as a debit to an account called sales returns and
allowances. An example of such transaction follows:
Sept.30 Sales Returns and Allowances 760
Accounts Receivable (or Cash) 760
To record return or allowance on
unsatisfactory merchandise.

The seller usually issues the customer a Credit Memorandum (i.e. Accounts Receivable
or Cash credited), which is a formal acknowledgement that the seller has reduced the
amount owed by the customer. Sales Returns and Allowances is a contra-income
account and are accordingly deducted from gross sales in the income statement (see
Figure 6.1).
Transportation Out (Freight Out)

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When the freight term is FOB destination, the seller shoulders the transportation costs;
when the term is FOB shipping point, the buyer bears the shipping costs.
Case No. 1. Assume that T. Calaguas Traders sold merchandise totalling P17,000 FOB
destination, freight prepaid; terms 2/10, n/30. The transportation costs amounted to
P1,900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 17,000
Freight Out 1,900
Sales 17,000
Cash 1,900
Sales on account; terms 2/10, n/30; FOB
destination, freight prepaid, P1,900.

If this invoice is collected on Dec. 5, the sales discount will be P340 (P17,000 x 2%).
Transportation out (Freight Out) is an operating expense.
Nov. 25 Cash 16,660
Sales Discounts 340
Accounts Receivable 17,000

Case No. 2. Assume that T. Calaguas Traders sold merchandise totalling P17,000 FOB
shipping point, freight collect; terms 2/10, n/30. The transaction costs amounted to
P1,900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 17,000
Sales 17,000
Sold merchandise on account; terms 2/10
n/30; FOB shipping point, freight collect.

There is no debit to transportation out (freight out) account since the shipping term
provided that the buyer should shoulder the transportation costs. If this invoice is
collected on Dec. 5, the sales discount will be P340 (P17,000 x 2%). The entry would
be:
Dec. 5 Cash 16,660
Sales Discounts 340
Accounts Receivable 17,000

Case No. 3. Now, assume that T. Calaguas Traders sold merchandise totalling P17,000
FOB destination, freight collect; terms 2/10, n/30. The transportation costs amounted to
P1,900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 15,100
Freight Out 1,900

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Sales 17,000
Sales on account; terms 2/10, n/30; FOB
destination, freight collect, P1,900.

Accounts receivable is decreased by the transportation charges paid by the buyer for
the benefit of the seller. If this invoice is collected on Dec. 5, the sales discount will be
P340 (P17,000 x 2%) since the discount applies to total sales.
Dec. 5 Cash 14,760
Sales Discounts 340
Accounts Receivable 15,100

Case No. 4. Assume further that T. Calaguas Traders sold merchandise totalling
P17,000 FOB shipping point, freight prepaid; terms 2/10, n/30. The transportation costs
amounted to P1,900. The entry to record this transaction would be:
Nov. 25 Accounts Receivable 18,900
Sales 17,000
Cash 1,900
Sales on account; terms 2/10, n/30; FOB
shipping point, freight prepaid, P1,900.

If this invoice is collected on Dec. 5, the sales discount will be P340 (P17,000 x 2%).
The discount only applies to total sales.
Dec. 5 Cash 18,560
Sales Discounts 340
Accounts Receivable 18,900

Questions

1. What is the first part of the income statement of a merchandising

business? Why do you think your answer is the first part?
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2. What constitutes Net Sales?

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3. From the viewpoint of the seller, how do sales discounts differ from
purchases discounts?
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Activity
Direction: Prepare the journal entries: (If it needs computation, kindly
include the computation beside the journal entry)
Some of the sales transaction of Leon General Distributors whose credit
terms are 5/10, n/60 follow:
June 1 Cash sales, P180,000.
4 Sales on account, P650,000.
7 Received returned merchandise sold on account, P90,000.
10 Collected the amount due from credit sales.
Answer:

On June 8, 2016, Bea One Curtains sold merchandise for P16,000 to

Northern Interiors; terms 5/10, n/30. On June 12, P4,000 worth of the
merchandise was returned. On June 18, Bea One Curtains received the
payment for the amount due.
Answer:

Quiz

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Directions: Write the letter of your answer on the space provided.

__________ 1. A sale on March 21 with terms n/10 eom is due to be collected by?
a. March 31 c. April 10
b. April 1 d. April 30

__________ 2. The entry to record the return on goods from a customer would include
a…
a. Credit to Sales
b. Credit to Sales Returns and Allowances
c. Debit to Sales
d. Debit to Sales Returns and Allowances

__________ 3 . The entry to record sale of P7,500 with terms of 2/10, n/30 would
include a…
a. Credit to Accounts Receivable for P7,500
b. Credit to Sales for P7,500
c. Debit to Sales Discounts for P150
d. Debit to Sales for P7,350

__________ 4. The collection of a P4,000 account within the 2% discount period would
result in a…
a. Credit to Accounts Receivable for P3,920
b. Credit to Cash for P3,920
c. Debit to Accounts Receivable for P3,920
d. Debit to Sales Discounts for P80

__________ 5. The collection of a P5,000 account beyond the 2% discount period

would result in a…
a. Credit to Accounts Receivable for P5,000
b. Credit to Cash for P5,000
c. Debit to Cash for P4,900
d. Debit to Sales Discounts for P100

__________ 6. A buyer received an invoice for P6,000 dated June 10. If the terms are
2/10, n/30, and the buyer paid the invoice within the discount period, what amount will
the seller receive?
a. P6,000 c. P4,800
b. P5,880 d. P 120

__________ 7. When a seller of merchandise allowed a customer a reduction from the

original price for defective goods, the seller will issue to the customer a…
a. Credit Memorandum c. Official Receipt
b. Debit Memorandum d. Sales Invoice

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__________ 8. When the seller advances the transportation costs and the terms of sale
are FOB shipping point, the seller records the payment of the transportation costs by
debiting…
a. Accounts Payable c. Sales
b. Accounts Receivable d. Freight In

Use the following information to answer the following question. Write your computation
and answer on the space provided.

Account Name Debit Credit

Sales 750,000
Sales Returns and Allowances 15,000
Sales Discounts 10,000
Purchases 170,000
Purchases Returns and Allowances 20,000
Freight In 30,000
Selling Expenses 75,000
General and Administrative Expenses 275,000

9 – 10. How much is the Net Sales for the period?

Answer:__________________

Reflection

As an accounting student what have you realized in the lesson?

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References
Ballada, Win. 2017. Fundamentals of Accountancy Business &
Management 1. Manila, Philippines. DomDane Publishers. pp. 305-308.

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