Wednesday, July 11, 2012

Cash Discount, Purchase Discount, Sales Discount

Cash discount is given to customers in order to induce them to pay promptly or even before the payment terms. The amount of cash discount is recorded in the Seller's Book as a debit to Sales Discount. Sales Discount is a contra sales account or is deducted to Sales to get Net Sales. On Buyer's Book, cash discount is recorded as a credit to Purchase Discount (if under periodic inventory system) or Merchandise Inventory (if under perpetual inventory system). Purchase discount is a contra purchase account or is deducted to Purchases to get Net Purchases. Payment terms maybe stated as "2/10, n/30" which means that if the maximum payment term 30 days but if the payment is made within the first 10 days, a cash discount of 2% will be deducted from the invoice amount, and if the payment is made beyond 10 days but within 30 days, no cash discount will be given and the payment should be the whole invoice amount. Cash discount maybe recorded using the Gross Method or the Net Method.


See discussion on trade discount, periodic inventory system and perpetual inventory system.

Purchase Allowances

Purchase Allowances account is one of the contra-asset account, particularly a contra-purchases account. The normal balance of the Purchase Allowances is credit. This decreases amount of Purchases to arrive at Net Purchases. This is also an account used by the buyer.

Transactions under this account occur because of certain problems encountered during the purchase of inventories, such as defective merchandise purchased, incorrect specification between products purchased and products delivered and goods were damaged while in transit due to seller's fault.

Purchase Allowances happens when the buyer chooses to accept the damaged and/or defective merchandise or the incorrect product, but with the condition that the seller will decrease the price of the product. The decrease in price made by the seller in this case is called a Purchase Allowance and it will decrease amount of Purchases.

Example: The buyer noticed that the Refrigerator delivered to him has a scratch but does not affect the performance of it. The buyer accepted the unit although it has scratch but with the condition to decrease by 10% the price of it. Seller agrees. The 10% decrease in price is a Purchase Allowance which decreases the Purchases account.

See also Purchase Returns and Allowances and Purchase Returns.

Purchase Returns

Purchase Returns account is one of the contra-asset account, particularly a contra-purchases account. The normal balance of the Purchase Returns and Allowances is credit. This decreases amount of Purchases to arrive at Net Purchases. This is also an account used by the buyer.

Transactions under this account occur because of certain problems encountered during the purchase of inventories, such as defective merchandise purchased, incorrect specification between products purchased and products delivered and goods were damaged while in transit due to seller's fault.

Purchase Returns occurs when goods are actually returned by the buyer to the seller because the goods delivered may not be used by the buyer due to damage, defect or is totally different from what was stated in the purchase ordered by the buyer.

Example, the customer ordered a 10-Feet Refrigerator but the seller delivered a 6-Feet Refrigerator. In this case, buyer may opt to return the refrigerator delivered because it is of wrong specifications.

Another example would be like this. The customer ordered a pair of shoes with 8-inch in size. The seller delivered the 8-inch shoes but the pair of shoes is of different colors due to fault in packing. Again in this case, the buyer will return the shoes because the buyer cannot use the shoes.

See also Purchase Returns and Allowances and Purchase Allowances.

Purchase Returns and Allowances

Purchase Returns and Allowances account is one of the contra-asset account, particularly a contra-purchases account. The normal balance of the Purchase Returns and Allowances is credit. This decreases amount of Purchases to arrive at Net Purchases. This is also an account used by the buyer.

Transactions under this account occur because of certain problems encountered during the purchase of inventories, such as defective merchandise purchased, incorrect specification between products purchased and products delivered and goods were damaged while in transit due to seller's fault.

See also Purchase Returns and Purchase Allowances to check their difference.

Friday, July 6, 2012

FOB Shipping Point, Freight Prepaid

Under FOB Shipping Point, Freight Prepaid, the Buyer shoulders freight charges (FOB Shipping Point) but instead of the Buyer making the actual payment to the shipping company or logistics company, the Seller makes the actual payment or advances the payment on behalf of the buyer (Freight Prepaid).

Accounting treatment is a little bit complex. There is no Freight-in account, instead a Freight-out account (an expense account) which is recorded in Buyer's book because buyer is the one who shoulders the freight charges. Seller option is to have a receivable from the buyer or the accounts payable of the buyer will increase to include the advance payment made by the Seller.

FOB Destination, Freight Collect

Under FOB Destination, Freight Collect, the Seller shoulders freight charges (FOB Destination) but instead of the Seller making the actual payment to the shipping company or logistics company, the Buyer makes the actual payment or advances the payment on behalf of the seller (Freight Collect).

Accounting treatment is a little bit complex. Freight-in account should still be with the Seller's book because seller is the one who shoulders the freight charges. Buyer option is to have a receivable from the seller or may offset the said payment from the buyers payable to the seller.

FOB Shipping Point, Freight Collect

Freight Collect is a freight term used in accounting. Under freight collect, the Buyer is the one who makes the actual payment to the shipping company or any other logistics company. Normally if the contract between the buyer and seller is FOB Shipping Point, payment of freight is freight collect. This is also the assumption when problem in accounting is silent.

Under FOB Shipping Point, Freight Collect, Buyer shoulders the freight charges (FOB Shipping Point) and at the same time, Buyer is the one who makes the actual payment to the shipping company (Freight Collect).

However, it may also be possible to have a contract with shipping company or logistics company under FOB Shipping Point, Freight Prepaid. (See also FOB Shipping Point, Freight Prepaid)