Net Sales

Alright so now let's dive a little more into revenue and see what kind of things could decrease our revenue. Alright let's start with the first one here, a sales discount. Okay so there's a special system we use to denote discounts and I want to be real quick about this discounts where this is a special kind of discount, this isn't a discount on, you know you walk into Walmart and they say hey 50% off this, this isn't that type of discount. This is a discount for when you extend credit to a customer. So let's say you allow the customer 30 days to pay but they pay you sooner. Okay they're paying you quicker. Well that's when they get this discount. Okay so this is a discount for quick payment. Okay and we're gonna see the same thing on the purchases side. But now let's see how this deals with on the sales side. Okay so on the sales side in all situations we're gonna deal with this notation. Okay we're gonna see something like this where it says to 10 and 30 which reads as 2 10 net 30. Okay so this is like a special notation they use to basically try and be extra confusing here but you just want to know what each of these numbers mean. Okay so what we have here, we've got this two in the 2 10 net 30. The two is the percentage amount of the discount. Okay so remember we're giving the customer a discount for paying us quickly. Okay so if they pay us quick enough they can take 2% off of the price and and pay us a little less. Okay so that's the benefit to the customer for paying us quicker. Okay so this 10 well that's the amount of time we're giving them to get the discount. Okay So that's a number of days. So this basically says that if they pay us in the next 10 days they can take a 2% discount off of the payment. Cool. And then the end well that just stands for net there's nothing really um about that. It basically just tells us that the net 30 this 30 so we'll let me pull it from the other one over here. The 30. That's the total days that you're allowed to pay. Okay? And if if you take till the 30th day let's say you're paying on the 30th day. Well you don't get the 2% discount right? Even if you're paying on the 11th day on the 12th day you're not gonna get the 2% discount. This 30 just tells you the total amount of days. Okay So generally that doesn't really matter the 30. Honestly when you when you're taking this class that that last number is not gonna make a big difference in our calculations. Okay the numbers you really want to focus on is the two which is the percentage discount and the 10. Okay so those numbers could change right? We could see like 1 10 net 30 or 3 15 net 45. Right? All these numbers can change but the meaning of the number stays the same. The first one is the percentage discount. Then the days to receive the discount and then finally the total days allowed. Alright, so let's go ahead and do this first example and let's go ahead and see this in action. Okay. Abc company sold 100 units of product X for $2000 on january 14th. Okay. Abc offered terms of 3 10 net 45. Okay, so that's the important thing right there, that's our sales discount. Abc company received payment on january 19th. Record the sale and receipt of cash in abc company's books. Alright, so there's gonna be two entries here, There's gonna be the first entry when we make the sale and then a second entry when we receive the payment. Okay So the first thing we want to consider is whether or not they're going to get the discount. Okay so we have the sale was on january 14th and the receipt of payment was on the 19th. So january 14th. We had the 15th 16th, 17th, 18th 19th. They paid you five days later so this is perfectly fine. Right? They they they made it under the 10 day threshold and they do get the discount. Okay, so one more thing here when we when we do sales discounts, there's two ways to discuss them. We can have the gross method or the net method. Alright. Generally pretty much every teacher and every textbook for the first accounting class is only in a focus on the gross method. Okay. So you're pretty much likely only to need to know the gross method. I'm also gonna do the net method in a separate video that way, just in case your teacher, you know, is super vigilant and wants you to learn it, you'll have access to that as well. Okay, so let's start here with the gross method and let's do the first entry. Okay? So the sales entry is very simple. We're just gonna make the entry uh on the sales day. And when we say gross, that means the full amount. Okay, the gross amount is the full amount. And it says that we sold 100 units for $2000 right? And we haven't received any money, right? We gave them credit to pay us over the next 45 days, we gave them the chance to pay us right? Net 45. So our entry is gonna be, we're gonna debit accounts receivable, right? I'm gonna put a ar for accounts receivable, And we're going to debit that 2000, right? Because we're owed $2,000. So now we have this asset for $2,000. Uh we're debating right there and we're going to credit our revenue, right? We earned the revenue, we sold the product to the customer, so we earn our revenue at this point and we earned 2000 in revenue. Okay So now we're going to receive the money a few days later. But remember when we receive the money, we're not going to receive the full 2000 right? They've earned the discount, they're allowed to take 3% off the price. So let's see how much we're actually gonna get, right if it's 2000 was the total amount. Let's see what the amount of the discount was. 3% 2000 times point oh three is $60 is the amount of the discount? Okay So we're not gonna receive $2000 we're gonna receive 2000 minus $60. So 2000 minus 60 the cash. So the cash is going to be 2000 minus 60 1940. Okay So since they're paying us so soon they don't have to pay us the full 2000, they can get away with paying us 1940. So the receipt, yes, we're gonna receive cash, right? And this cash is 1940. That's the amount of cash that we received from the customer. So we're gonna debit cash for that amount and then we're gonna have the discount, right? There was a sales discount. And this sales discount is gonna be a contra account to the revenue. So remember we talked about contra accounts, they have an opposite balance, right? So a revenue account has a credit balance. So a contra revenue account, an account that decreases our revenue is going to have a debit balance. Okay. So we're gonna have this account and we're gonna call it sales discounts. Okay. And that's where the $60 is gonna go, right? Because we're supposed to get 2000, we only get 1940. So this $60 we want to keep keep track of how many sales discounts we have we're giving to our customers so we put them all into this account, it helps us manage. You know, how much were the sales discounts instead of just directly debating revenue? Right? If we were to just debit revenue $60, we wouldn't have as much information here. We're keeping all the discounts separate in this other account. Sales discounts. So we have our debit to cash for 1940, our debit to sales discounts which is right. That's decreasing our revenue from the 2000 we earned above. It's decreasing it now to a net of the 1940 that we received. So the last thing is the credit part of this transaction and the credit part, well we were we were originally owed this much money, right? We had an accounts receivable for $2,000 but we don't get we're not owed that money anymore. Right? The customer made good on their payment and they paid us already. So we're gonna get rid of the accounts receivable with a credit, whoops, The credit of 2000 is going to get rid of that account receivable. And how was it paid off? Well, we got 1940 in cash and the rest was a sales discount. Cool. So that's what the entries look like from the gross method. Let's pause here and do the net method. Remember not everybody's gonna need to know the net method, so just double check with your syllabus or with your teacher and see if you're gonna need to focus on the net method as well. Alright, let's do that now.

Alright, so the difference with the net method is that we're going to assume that the customer is going to pay us quickly to get the discount. Okay, so this is the assumption that they're definitely going to take the discount and then when we received the cash will adjust for that, did we actually get the discount? Did they? Excuse me? Did the customer actually take the discount or not? Okay. So when we do the sales entry, when we take our revenue in the first place? Right. The problem told us we we sold 100 units for $2,000. Well we're not gonna take revenue for 2000 right away, we're gonna net it to the amount of the sales discount. So we're gonna do an accounts receivable because we're owed money and we are gonna credit revenue just like before. Okay so our entry is gonna look very similar except instead of taking the full 2000, we're gonna take the net amount, we're gonna do the cash amount this 1940 here. Right. So what we're assuming is that the customer is gonna get this 3% discount And if we do the 2000 times 3% like we did before we see that the discount would be $60 here. So instead of receiving 2000 we're expecting to receive 1940. Okay so that's the amount we're gonna put in our revenue entry. So we're gonna say we're expecting to receive 1940 in in accounts receivable and we've earned revenue of 1940. Okay so now we have an account receivable notice at the discounted price. So now when the time comes to receive the money, this is when we would see a difference. Okay. In this case, well they did take the discount so we're fine. All we need to do is we're gonna say since they paid us on time, right, they paid us within the 10 day window that they had to receive the discount. Well, we're going to debit or cash, They're gonna pay us 1940 in this case. Right? Because that's the amount of cash we received and we're going to credit our A. R. For 1940. Notice how easy the net method is when everything works out right? If if we're expecting the customer to take the discount and the customer does take the discount. Well then there we go. We were set. We already have all the entries and we're pretty easy, pretty easy to do it. We just have to first calculate the net amount of revenue we would get when they take the discount. Okay, So the big trick there is to just figure out how much discount is and find the net amount of revenue. Alright, In the next example when we do the net method, we'll see a different situation where the discount is not taken. All right, So let's check out that example to

All right, So let's try this example. It's pretty much the same as the example above. Except I changed the payment date where we received the money from the customer. Let's check it out. Abc company sold 100 units of Product X. For $2000 on january 14th. Abc offered terms of 3 10 net 45. Right, What does that mean? That means a 3% discount if they pay us within 10 days and otherwise they have 45 days to pay us. Abc company received payment on february 1st, record the sale and receipt of cash in abc company's books. All right, so let's do the gross method first. Remember I said most books and most teachers are going to focus on the gross method and just double check if you need the net method, most of you will not even need the net method. Alright, so from the gross method, we are gonna take the gross amount of revenue on the sale date. So they didn't pay us in cash, right? They're gonna pay us later. So we're gonna take an account receivable, right? We're going to debit account receivable for 2000 and we're going to credit revenue. Excuse Me. For 2000. Okay, so pretty straightforward there and then we have to see if they're gonna earn the discount, right? It's january 14th. Well, they have 10 days to pay to earn the discount that would give them up to the 24th. Right? And they didn't pay until february 1st so they don't earn the discount. Right? They didn't get the discount. They paid us the full $2000 because they took longer than 10 days. So we're just gonna receive cash Of $2,000. We debit cash 2000 and we credit our accounts receivable for 2000 because we're no longer owed that money. So notice how simple it is when they don't take the discount, right? It's just we make our accounts receivable entry and then we receive cash. So let's see the same thing from the net method. Alright, let's pause here.

Alright let's try the same thing from the net method. So we've got this company that sold the 2000 units and we've got a 3% discount right? We've got a 3% discount and just like we calculated above well we have the 2000 times the 3%. Right? That's the amount of the discount That would give us a $60 discount. Right? So that means that instead of paying 2000 they're gonna pay 60 less. So instead of 2000 they would actually pay 1940 if they took the discount. Right? Um So when we do the net method we assume that the customer is gonna take the discount. So when we make our sales entry we make it with the discount included. So we're going to debit our accounts receivable because we're owed money and we're gonna credit revenue just like we did in the other entry But in this case we're gonna do the net amount with with the discount. So we're going to debit 1942 a. r. and 1940 credited to revenue. Right? So we've we've taken the net amount instead of the full 2000. This is us assuming that the customer is gonna take the discount. Well in this case the 10 day window past right? We sold it on january 14th but they didn't pay us til february 1st almost like 17 or 18 days later. That's past our um our 10 day threshold. Okay so since they paid us after the 10 day threshold they have to pay us $2000 instead of 1940. Right? So the cash we're going to receive in this case is 2000, it's not 1940 right? We're gonna receive 2000 And we have to get rid of that account receivable. So we're gonna credit accounts receivable for 1940, right? And it has to be 1940, not 2000, because when we did the account receivable up here, it was for 1940. So we have to get rid of it at 1940, right? That gets it off our books, but this equation isn't balanced yet. Right? So the idea is that we assumed that they were gonna take the discount but they didn't right, they didn't end up taking the discount. So our revenue should actually be 2000, not 1940, right? Because we earned $2,000, not 1940. So what we do to keep track of the revenue we get from the sales discounts that are forfeited, what we're going to credit another revenue account called sales discounts Forfeited. Okay, so this is an account right here, this is another revenue account. We're gonna have our account for our main revenue where we have the 1940 and then we're gonna have another one with the sales discounts forfeited, where we're gonna accumulate revenues there from people who didn't pay us quickly. Okay, and that would be the $60 that they forfeited. Okay, so we received 2000 in cash and in essence, we've got 2000 and revenue at this 20000.1940 in the revenue account and sales discounts forfeited is going to increase our revenue. That's another revenue account there. Okay. So you can see that this is, uh, pretty straightforward when you do the gross method or the net method, right? That that's about it here. So let's go ahead and pause and move on to the next video.

Alright, so let's discuss revenue in a little more detail. And let's see how sales returns when the customer returns, good or sales allowances can decrease our revenue, Let's check these out. So when the company sells goods, we're going to credit the revenue account, right? Pretty straightforward. We credit our revenue account whenever we sell something. So T. O. T. O. S. Company things on shelves. Company sold 500 units of things on account at a price of $12 per thing. Okay, so how much revenue did we earn? We sold 500 things, 500 times the $12. That's gonna give us six $6000 Right? That's what we earned. But we haven't been paid that amount, right? It says on account. So we're gonna have an accounts receivable a our accounts receivable for 6000. And we're debating that right to increase our accounts receivable, and we're going to credit our revenue, right? Our revenue for 6000, because that's how much we earn here. And how would this affect our assets would go up by 6000, Right, And our revenue would increase our equity also by 6000. Okay. Remember that all revenues and expenses, they flow through the income statement and they're all part of equity. Okay, revenues and expenses, they're all going to be part of equity. So there we go. We've got pretty simple straightforward entry, right there, accounts receivable and revenue. Let's do our first uh thing that could decrease our revenue and this is a sales return. So if the company, excuse me. If the customer returns the goods to the company, well this is a sales return right? They're not happy with the good and they get a refund. So the customer returned 100 units of things to T. O. S. Using the money back guarantee policy. Well these 100 units right? We said that the 100 units and we had a sales price it was $12 yep. Up above we had a sales price of $12. So this is the amount of money we would have had to return to the customer right? 1200 $1,200 worth of goods. Now let's assume that this 100 that the customer returns. They were part of this on account. Right? This is the customer risk let's say this was all one order where 11 customer ordered 500 things. Those things arrived at their warehouse, they inspected them and they said hey this batch this box of 100 things. They don't meet our standards. So take them back. Okay so remember they haven't paid us yet. Right this was on account. So we have to decrease that Uh that account receivable. But the main thing I want you to see here is that we're gonna be debuting instead of decreasing our revenue directly. Right? We have our revenue account up here for 6000 from the previous entry. Well we're not gonna just debit revenue to decrease it. We're going to debit an account called sales returns. Okay And this is a contra account to revenue. So this is where revenues go up with a credit. These sales returns are going up with a debit to decrease our revenue. Right? So there's gonna be uh What do we say? They're gonna be joined together when we find our net amount of revenue, we're gonna have our gross revenue up top with that 6000. And then we're gonna be decreasing it for these types of things. Like a sales return. Okay so this sales return was for 1200. Alright so when we think about our net revenue at this point the net amount we would have the 6000 minus the 1200. Right? We have a credit for 6000 in the revenue account and a debit for 1200 in the sales returns account. Okay. And we're going to credit here accounts receivable, right? Because we're no longer expecting that customer to pay us the 1200 because they returned the goods. Right. So they no longer owe us the money we got the goods back, they owe us $1200 less. Okay So they're still gonna owe us right because the a. R from the previous entry they were gonna owe us 6000 but now they returned some of it. So they're gonna owe us a little less based on that credit. Okay. So if we saw in the previous entry that our A. R. Had gone up by 6000, our revenue up by 6000. Let me keep those in here. A. R. Had gone up by 6000 and our revenue was up by 6000. Well now we made an entry to decrease our a. r. by 1200 and we're gonna decrease our equity with this sales return By 1200. Okay? So notice that we stay balanced here as well. Cool. Alright, so let's pause real quick and in the next video we'll talk about the sales allowance. All right, let's do that now.

Alright so now let's discuss the sales allowance. I want to distinguish a sales allowance first from a sales return and as well from a sales discount. Okay All of these things are things that lower our revenue so the sales return. This is where the customer was unsatisfied and they return the product right? So we actually got the product back into our inventory with a sales allowance. We're still dealing with an unsatisfied customer. But they're gonna keep the product, they just want a lower price. So instead of paying the full price they want to discount maybe because the quality wasn't so good or whatever they want some lower price. Okay that's the sales allowance. Lastly we have those sales discounts and this is where we offer the customer a discount for paying us quickly. Okay so that's the difference this customers not unhappy with a sales discount, they're just paying us quicker so they pay a little less. Okay so let's dive into the sales allowance. So remember here this is where the customer is gonna keep the goods but the company lowers the price. So things on shelves sold 500 things on account at $12 per thing. When low quality things arrived the customer agreed to keep each thing at a price of $9 for this order. So notice they were unsatisfied but they're gonna keep them at a lower price. Okay so were originally when we first sold the things when we first sold them we're gonna make an entry. Something like this. Right? We have our accounts receivable, we're expecting to be owed $6,000. So we're going to debit Accounts receivable right to create the asset and then we're going to credit our revenue for 6000. Right? We sold these things we thought we were gonna get 6000 and that's 6000. Sorry it's the same as above when we were doing the other it was the 500 things times the $12 per thing gives us the 6000. Okay? But after it got to the warehouse the warehouse manager they're inspected everything and said you know what we don't like the quality here we need a lower price. Okay. So what is the amount of the lower price? $9. So what I want to think about is the amount of the discount it went from $12 to $9. So there was a $3 discount that they got. Right So for 500 units they got a $3 discount. Right and this is the discount amount and it's going to be 500 times three is 1500. But this remember this isn't like a sales discount for quick payment. This is a sales allowance for selling something low quality or something like that. So this is gonna be the amount of the allowance right here. Is the amount that they're paying less. Okay so they're paying us $1,500 less. That's the allowance. So how much cash are we gonna receive? So instead of paying a 6000 they're paying us 1500 less. So that comes out to 4500. Right? That's the cash that we're actually going to receive from the customer. Okay, So let's go ahead and make our journal entry first. We're gonna have cash, right? We're gonna debit cash. I'm gonna do it over here debit cash 4500, Right? Because that's the amount of cash or physically gonna pay us at that $9 price. Then the 1500 allowance. This is going to be a debit as well. Sales allowance is going to be a debit because it's a contra revenue account. It's a it's a revenue account that decreases revenue. Right? The idea here our revenue, we thought we were gonna get $6000 right? But we ended up only getting 4500 in cash. So to account for that less revenue that we really got, we didn't really earn 6000 in revenue. We do this debit account for this 1500 where we're gonna keep all our sales allowances. This makes it easier at the end of the period to say, hey man, look at all these sales allowances. Clearly there's some sort of quality issue with our product, right? Something like that. We're going to get better information than if we were to just debit revenue directly and just have a lower revenue amount here, we're showing hey we think we should have earned sixth. But because of this sales allowance were only earning 4500. Okay so we're gonna debit cash debit, sales allowance. And then we're going to credit accounts receivable, right? Because we were owed this $6000 originally and now we're not owed 6000 anymore. Right? We they paid off that obligation with the 4500 And striking a deal to pay us less money. So we're going to get rid of that $6,000 receivable. And you can see that our entry is balanced there, right? Our debits equal our credits. And this was our original entry over here. Cool. So we've got two entries there. That is the sales allowance entry on the right. So what ended up happening? We had our A. R. There's gonna be quite a bit in here. But let's let's put it all in A. R. Went up by 6000 And then our cash went up by 4500. But then our A. R. Also went down by 6000 in the next entry. Right? We had our cash going up by 4500. But are they are down by 6000. So those washout, we're left with that cash going up 4500. Nothing with liabilities here. But on the equity side we had revenue we had revenue of 40 of 6000. Right 6000. And then our sales allowance is decreasing our revenue by 1500. And that gets us to that net 4500. So you can see that the assets went up by 4500, equity went up by 4500. It is uh balanced. So last thing on this video is this Net sales formula. Okay, so our net sales is where we take our sales revenue, that's the gross amount of sales like this, $6,000 that we're talking about above. And then we're gonna decrease it by all of these things. That might decrease it, right? The sales discounts that we saw, that's gonna decrease sales revenue as well as the sales returns and allowances are also going to decrease uh our our our net revenue, right? So if we take our gross amount, this is our gross amount of revenue. We subtract out some things like the discounts and the returns we get to a net amount of revenue. Cool. Alright, so that's about it here, let's go on to the next video.