Key Terms
GROSS PURCHASES
Original purchase amount before any reductions
NET PURCHASES formula
Gross Purchases
GROSS SALES
Original sale amount before any reductions
NET SALES formula
Gross Sales
Example
Net Sales = $293,500; COGS = $180,000 ($293,500 - $180,000) / $293,500 = 0.39 or 39%
PURCHASE RETURN
Merchandise sent back; full refund issued PURCHASE
ALLOWANCE
Customer keeps defective merchandise; partial refund
COGS FORMULA (Periodic only)
Beginning Inventory + Net Purchases - Ending Inventory = COGS
SHRINKAGE
Inventory disappears without an identifiable reason (theft, damage, obsolescence)
Debit
Merchandise Inventory Credit: COGS
Payable (full original amount) Credit
Merchandise Inventory (discount amount) Credit: Cash (amount actually paid)
RETURN AFTER PAYMENT (cash already sent)
Debit: Cash Credit: Merchandise Inventory
Credit sale
Debit: Accounts Receivable Credit: Sales
REVENUE RECOGNITION PRINCIPLE
Record revenue when it is earned - when the product or service is delivered. Drives the timing of the sales entry.
Credit
Accounts Receivable (full original amount)