FA27 - Inventory Discounts (2/10, Net 30) EXPLAINED

Summary

This video walks through a series of accounting transactions for Romney Inc., focusing on journal entries for inventory purchases, returns, discounts, and sales. The instructor highlights key concepts like treating freight costs as part of inventory value, applying discounts, and handling returns. The video also covers how to record these transactions in a systematic way, making it a useful resource for anyone learning accounting basics. The instructor emphasizes that while the problem may seem complex due to the number of transactions, it's manageable when broken down step-by-step.

Takeaways

• 📘 The video provides instructions on how to download a counting workbook from a website and access both public and members-only videos on YouTube.
• 🔍 The script covers a detailed walkthrough of accounting transactions for Romney Inc., including purchases, sales, returns, and discounts.
• 🛒 On February 1st, inventory was purchased on account for $3,400, with a 2% discount available if paid within ten days.
• 🚚 February 2nd involved paying $200 for freight, which is considered part of the inventory cost rather than an expense.
• 🔄 A return of $400 worth of inventory occurred on February 5th, adjusting the accounts payable and inventory values.
• 💳 On February 9th, the inventory was paid for in full, with a 2% discount applied, resulting in a payment of $2,940.
• 📈 Sales on February 11th included selling inventory on account for $3,500, with terms of 2/10 net 30, indicating a possible discount for early payment.
• 📦 Additional inventory was purchased on February 14th for $2,500, with a 1% discount for payment within the net 30 terms.
• 🛍 Another sale was made on February 19th, this time for $1,500 on account, with a cost of goods sold (COGS) of $600 and terms of 2/10 net 30.
• 💸 Payment for the February 14th inventory purchase was made on February 21st, taking the 1% discount, resulting in a payment of $2,475.
• 🔄 A customer from the February 11th transaction paid the full amount owed on February 24th, without taking the discount.
• 🛒 A customer from the February 19th transaction returned $100 worth of inventory on February 25th, which was credited back to their account and restocked.
• 💳 The final transaction on February 28th involved a customer from the February 19th sale paying the amount owing, less a 2% discount for early payment, totaling $1,372.

Q & A

Where can the problem discussed in the video be downloaded?

The problem can be downloaded at CountingWorkbook.com by clicking on the PDF link.

What additional content is available on the website besides the public YouTube videos?

The website offers more videos than those listed publicly on YouTube, including members-only videos covering every problem in the workbook.

What is the first transaction discussed in the problem, and how is it recorded?

The first transaction is a purchase of inventory on account for $3,400. It is recorded by debiting Inventory for $3,400 and crediting Accounts Payable for $3,400.

How should the cost of freight for inventory be recorded?

The cost of freight, which is $200 in this case, should be debited to Inventory rather than an expense account, as it is part of the cost of acquiring the asset.

What is the journal entry for returning $400 of inventory?

The journal entry for returning $400 of inventory involves crediting Inventory for $400 and debiting Accounts Payable for $400.

How is the discount on inventory payment calculated and recorded?

The discount is 2% of the remaining $3,000 owed after a return, which equals $60. The payment is recorded by crediting Cash for $2,940, debiting Accounts Payable for $3,000, and reducing Inventory by $60.

What entries are made when inventory is sold on account?

When inventory is sold on account for $3,500, the entries are: Debit Accounts Receivable $3,500, Credit Sales Revenue $3,500, Debit Cost of Goods Sold $1,600, and Credit Inventory $1,600.

How is the inventory purchase on February 14th recorded, considering the discount terms?

The purchase of $2,500 is recorded by debiting Inventory and crediting Accounts Payable for $2,500. Upon payment with a 1% discount, Cash is credited for $2,475, Accounts Payable is debited for $2,500, and Inventory is reduced by $25.

What happens when a customer returns inventory?

When a customer returns $100 worth of inventory, Accounts Receivable is credited, Sales Returns is debited for $100, Cost of Goods Sold is credited for $40, and Inventory is debited for $40.

How is the final payment from the customer on February 28th recorded, including the discount?

The payment is recorded by debiting Cash for $1,372, crediting Accounts Receivable for $1,400, and recording the $28 discount as a Sales Discount, which reduces Sales Revenue.

Outlines

00:00

📚 Introduction to Romney Inc.'s Accounting Problem

This paragraph introduces the accounting problem from a video, which involves combining purchases and sales transactions for Romney Inc. The video script guides viewers on how to access the workbook and videos covering all problems, including members-only content. It then jumps into problem 6.3a, which requires creating journal entries for a series of transactions, starting with a purchase of inventory on February 1st for $3,400, considering terms like a 2% discount for early payment. The explanation includes the accounting treatment for freight costs as part of inventory acquisition and adjustments for inventory returns and discounts.

05:05

🛍️ Sales, Purchases, and Discounts in Romney Inc.'s Transactions

The second paragraph continues the discussion of Romney Inc.'s accounting problem, focusing on sales and purchases made throughout February. It details the process of recording sales on account, the cost of goods sold, and the application of discount terms. The paragraph also covers the purchase of inventory on February 14th with terms of 1/15 net 30, the subsequent sale on February 19th, and the payment of the inventory purchase while taking advantage of the discount. Each transaction is carefully explained, emphasizing the accounting entries involved in sales, returns, and discounts.

10:05

🔄 Handling Returns, Discounts, and Final Payments in Romney Inc.'s Accounts

The final paragraph wraps up the accounting problem by addressing inventory returns, customer payments, and the application of sales discounts. It explains the accounting for a customer returning $100 worth of inventory and the necessary journal entries to reverse the sale and adjust inventory values. The paragraph also discusses the payment of the amount owing by a customer who took advantage of a 2% discount for early payment, resulting in a reduction of sales revenue. The summary concludes with the completion of the problem, highlighting the complexity of managing multiple transactions and the importance of accurate accounting entries.

Keywords

💡Journal Entries

Journal entries are the initial records of financial transactions in the books of a company. They are used to document the dual aspect of each transaction, affecting at least two different accounts. In the video, journal entries are created to record various transactions involving purchases, sales, returns, and discounts, which are essential for understanding the company's financial activities.

💡Inventory

Inventory refers to the stock of goods a company holds for sale in the ordinary course of business. It is a current asset and a key component of a company's balance sheet. In the video, inventory is purchased, returned, and sold, and its cost is adjusted for freight and discounts, illustrating the dynamic nature of inventory management.

💡Accounts Payable (AP)

Accounts Payable (AP) is a liability account that represents the amount owed by a company to its suppliers for goods or services that have been received but not yet paid for. The script discusses transactions where AP is credited or debited as inventory is purchased, returned, or paid for, showing the impact of these transactions on the company's liabilities.

💡Freight

Freight is the cost associated with transporting goods, which is often included in the overall cost of the inventory. In the video, freight is paid in cash and then debited to inventory, indicating that it is considered part of the asset's acquisition cost rather than an expense.

💡Discount

A discount in this context refers to a reduction in the amount due on an invoice if payment is made within a specified period. The video mentions both a trade discount, which reduces the purchase price of inventory, and a sales discount, which reduces the amount collected from a sale due to early payment.

💡Sales Revenue

Sales revenue is the income generated from the sale of goods or services. It is a key component of a company's income statement. The video discusses the recognition of sales revenue when inventory is sold on account and the subsequent adjustment for sales discounts.

💡Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the direct cost attributable to the production of the goods sold by a company. It includes the cost of the materials and labor used to create the finished goods. In the script, COGS is debited when inventory is sold to reflect the cost of the goods that were sold.

💡Accounts Receivable (AR)

Accounts Receivable (AR) represents the money owed to a company by its customers for goods or services that have been delivered but not yet paid for. The video describes transactions where AR is debited or credited as sales are made and payments are received, reflecting the company's receivables.

💡Sales Returns

Sales returns occur when customers return goods they have purchased. In the video, sales returns are recorded as a debit to a contra revenue account and a credit to inventory, indicating that the sale has been reversed and the inventory is available for resale.

💡Contra Revenue

Contra revenue accounts are used to record amounts that reduce sales revenue, such as discounts or returns. In the script, sales discounts and sales returns are recorded in contra revenue accounts, which helps to accurately reflect the net sales revenue.

Highlights

The video provides a downloadable workbook from a website with a PDF link.

The website hosts more videos than listed on YouTube, including both public and members-only content.

Members-only videos are accessible by joining through a button on the YouTube video player.

Problem 6.3a involves combining purchases and sales, adding complexity to previous problems.

Journal entries are created for various transactions of Romney Inc.

Inventory purchases on account are recorded with a debit to inventory and credit to accounts payable.

Freight costs are considered part of the inventory cost, not an expense.

Inventory returns reduce the inventory account and accounts payable.

A 2% discount is applied for payments made within ten days on inventory purchases.

Sales of inventory on account are recorded with debits to accounts receivable and credits to sales revenue.

Cost of goods sold is debited and inventory is credited for the cost of the sold items.

Sales discounts are considered when recording sales on account.

Inventory purchases made with discount terms are recorded with the discount applied.

Payments for inventory purchases reduce accounts payable and inventory value by the discount amount.

Customer payments for sales on account are recorded, with full payment if no discount is taken.

Sales returns are recorded with credits to accounts receivable and debits to sales returns and cost of goods sold.

A customer taking a discount on a sale with returns is calculated and recorded.

The video concludes with a summary of the complex transactions handled in the problem.

Transcripts

the problem from this video can be

downloaded at a Counting workbook calm

if you go to the website click the PDF

link and you can download a copy of this

and all of my problems for yourself now

if you check the website and you click

on videos you'll see there are more

videos than those I've listed publicly

on YouTube you can see that there's

every problem covered in the workbook

has either a public video or a

members-only video if you'd like access

to the members only video just click the

join button beneath the video player on

YouTube alright let's jump into the

problem let's examine problem 6 3a this

has us combining purchases and sales if

you did six one and you did six two they

kind of separated them and gave you just

a small taste six three a kind of puts

it all together and even adds a little

bit more so let's get going the

following transactions occurred for

Romney Inc and big long list of

transactions and it says give us journal

entries okay so that's what we're gonna

do start with the first one

Feb first purchased inventory an account

$3,400

okay so we're buying inventory on

account when you buy inventory on

account debit inventory and the amount

was thirty four hundred we credit AP

thirty four hundred now remember the

terms two percent discount if we pay

within ten days otherwise we've got to

pay the full amount within 30 February

second paid Freight on the inventory

okay we haven't had to deal with this

yet so paid cash of two hundred dollars

so let's credit cash because that's the

easy part here two hundred now very

interesting here when you pay to have

inventory delivered the cost of

acquiring the asset the cost to make any

asset kind of useful to you is actually

considered not an expense but part of

the cost of the asset so part of the

cost of the inventory is the delivery

charge which is a little bit weird again

I think a logical person might look at

this and say Oh debit freight expense or

every expense or something like this we

do not debit that we say look the costly

inventory if you wanted to get this

inventory 3400 it was necessary to pay

the $200 on top to acquire the inventory

that's part of your inventory costs so

we actually debit inventory here for 200

so again $3,400 of inventory plus $200

of shipping it's actually a thirty six

hundred dollar piece of inventory or a

bunch of inventory okay so that was

February 2nd February 5th bad news here

we returned four hundred dollars of

inventory okay so we were returning some

inventory credit inventory four hundred

dollars debit ap we're saying we don't

owe you that four hundred dollars

anymore we are returning the inventory

we're assuming everybody agrees to that

February ninth we pay for the inventory

when I pay for the inventory I got a

credit cash but we gotta figure out how

much now as we're looking at this I'm

ignoring this part of the transaction

right this freight part because I've

already paid the freight I don't have to

worry about that but I do have to worry

about this $3,400 inventory purchase and

the four hundred dollar return well

guess what though it's three thousand

dollars worth of inventory now the

question is do I qualify for the

discount the answer is well I paid

within ten days yes so I get a 2%

discount which is a sixty dollar

discount meaning I pay twenty nine forty

right 29 40 I pay $60 is discount well

if I pay twenty nine forty credit cash

29 40 on February 9th

i debit ap to say whatever I owed on

this I don't know anymore I've paid the

bill in full and the bill in full was

$3,000 right it was the 3400 - the 400 I

still owed $3,000 on the bill so I got a

debit 8p for that $3,000 and you can see

now I've got 3,400 and debits - AP

$3,400 and credits - ap but wait you say

there's a $60.00 missing amount this

reduces our inventory value we only pay

2940 for the inventory so that $60

discount comes out of the value of the

inventory okay moving on February 11th

now sold inventory for $3500 on account

the inventory cost $1600 terms 2/10 net

30 so we sold 3,500 dollars of inventory

or inventory that was priced at 3,500 so

let's deal with that

February 11th debit cash no cash we sold

on account debit accounts receivable

credit sales Rev for how much 30 I

thought yeah there it is 3,500 sorry yes

go on blind there Stephanie are credit

sales debit cost of goods sold

credit inventory for what we sold so for

the cost and that was $1600 now again

there are discount terms on this so when

I make this sale I'm keeping that in

mind that I'm gonna probably or possibly

need to adjust this February 14th

Valentine's Day oh now we're starting to

juggle we purchase some inventory $2,500

terms 115 net 30 all right so Feb 14th

debit inventory credit AP for an

inventory purchase and the amount was

2,000

five hundred dollars we make another

sale on February 19th oh my goodness

it's old inventory 1500 on account $600

was the cost terms to ten thirty okay

whenever I sell inventory again I'm

thinking two entries debit AR credit

sales Rev debit cost a good sold credit

inventory and the amounts were given up

there the amounts were on February 19th

1500 was the sales amount 600 was the

cogs amount okay that's it for February

19th February the 21st paid for the

inventory purchase from February 14th

okay so February 14th we purchased

inventory terms 115 a 30 yes when we pay

we are taking our discount there were no

sales returns in in between so it's a

$2,500 bill but we take a 1% discount

you can see the terms are 115 net 30 so

this is a $25 discount meaning we pay

twenty four seventy-five so let's do it

February I think it was twenty first let

me just tech on my key so let's go back

up yeah everybody's wedding first

we're gonna credit cash 2475 we're gonna

debit ap in the AP related to our

February 14th amount was 2500 bucks

so debit a be 2500 and then there's this

$25 discount amount that is a reduction

in our inventory value we did not pay

the full 24 70 we did not pay the full

2500 for inventory we paid twenty four

seventy five so we got a reduce our

inventory value by that twenty five

dollar discount it's the inventory value

taury on the books is what you paid for

it not some full price amount it's it's

the discounted amount next February 24th

customer from February 11th transaction

paid the amount owing okay so let's see

what happened on February 11th remember

the details of that sold three thousand

dollars of inventory on account terms

two ten net thirty Feb 24th they pay

they don't get their discount so they

just got to pay the full amount okay so

they had to pay us they owed us 3500

bucks guess what they got to pay us 3500

bucks so February 24th debit cash 3500

credit AR 3500 that was a simpler one

next February 25th a customer from

February 19th transaction let's

highlight that transaction returns $100

worth of inventory caught cost forty the

inventory was good condition and put

back on the shelf for resale okay so

they made $100 returned and we're gonna

give them $100 credit to their account

so again they made this purchase and at

$1500 purchased and they said hey $100

this we didn't like we'll give them $100

credit to their AR this was on February

the 25th credit AR buy a hundred bucks

the debit is to sales returns a hundred

bucks

so they've returned the item it goes to

this contra revenue account called sales

returns so far so good

we got to put the inventory back on the

shelf and it's $40 worth of our

inventory the credit is two cogs to say

okay that stuff that we said was goods

that we sold we didn't sell it

right we went debit cogs Credit

inventory now we're saying reverse that

that sale didn't happen

flip that portion of the sale back so

there we've done it last but certainly

not least and one of the trickier ones

and this is just a juggling act right

all we're doing is juggling here

customer from February 19th sale pays

the amount owing okay so we kind of

figure out what they owe us so I'm gonna

erase this stuff just because we're not

really referring to it anymore

okay so February 1915 hundred dollar

sale and they've returned a hundred

dollars worth of merchandise so it's

really fourteen hundred dollars that we

are planning to collect but guess what

they paid within 10 days terms were a 2%

discount February 19th or 20th it is

within 10 days so they can take a 2%

discount they get $28 off meaning they

pay $1,400 minus $28 is thirteen hundred

and seventy two dollars okay let's deal

with that this is on Feb 28th debit cash

I forgot the amount already 1372 we got

to get rid of their AR there AR was

$1400 it was fifteen but it went down to

fourteen so we get rid of their AR and

we're left with $28 in debits this

amount again it's like a reduction of

our sales revenue but there's a specific

account for this called sales discounts

we gave a discount and this gets word as

a contra revenue account it reduces our

sales revenue by 28 bucks okay I think

we have done it here ladies and

gentlemen we've made it to the bottom of

this problem all sorts of purchases

returns discounts etc a challenging

problem but it's more of a juggling act

I don't think it's

if you look at each individual

transaction I don't think it's any

harder than 6 1 or 6 2 but it's just

that there's so many of them that's all

for this video stay tuned for our next

one bye for now