Concept explainers
(1)
To prepare: Journal entries for the transactionsin the books of NG Spa
(1)
Explanation of Solution
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Prepare journal entry for the inventory sold on account, on August 2.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 2 | 1,000 | ||||
Sales Revenue | 1,000 | |||||
(To record revenue earned on account for the goods sold) |
Table (1)
Description:
- Accounts Receivable is an asset account. Since amount to be received has increased, asset account increased, and an increase in asset is debited.
- Sales Revenue is a revenue account. Since revenues increase equity, equity value is increased. An increase in equity is credited.
Prepare journal entry for the cost of goods sold, on August 2.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
August | 2 | Cost of Goods Sold | 650 | |||
Inventory | 650 | |||||
(To record cost of inventory sold) |
Table (2)
Description:
- Cost of Goods Sold is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Inventory is an asset account. Since inventory is sold, and the cost of inventory sold is transferred to Cost of Goods Sold account, asset account decreased, and a decrease in asset is credited.
Prepare journal entry for the inventory sold on account, on August 3.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 3 | Accounts Receivable | 500 | |||
Sales Revenue | 500 | |||||
(To record revenue earned on account for the goods sold) |
Table (3)
Description:
- Accounts Receivable is an asset account. Since amount to be received has increased, asset account increased, and an increase in asset is debited.
- Sales Revenue is a revenue account. Since revenues increase equity, equity value is increased. An increase in equity is credited.
Prepare journal entry for the cost of goods sold, on August 3.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
August | 3 | Cost of Goods Sold | 400 | |||
Inventory | 400 | |||||
(To record cost of inventory sold) |
Table (4)
Description:
- Cost of Goods Sold is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Inventory is an asset account. Since inventory is sold, and the cost of inventory sold is transferred to Cost of Goods Sold account, asset account decreased, and a decrease in asset is credited.
Prepare journal entry for the goods returned on August 6.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
August | 6 | Sales Returns and Allowances | 100 | |||
Accounts Receivable | 100 | |||||
(To record sales returns) |
Table (5)
Description:
- Sales Returns and Allowances is a contra-revenue account, and contra-revenue accounts decrease the equity value, and a decrease in equity is debited.
- Accounts Receivable is an asset account. Since inventory is returned, amount to be received has decreased, asset account decreased, and a decrease in asset is credited.
Note: Sales returns value is $100
Prepare journal entry for the cost of goods returned on August 6.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
August | 6 | Inventory | 80 | |||
Cost of Goods Sold | 80 | |||||
(To record cost of goods returned) |
Table (6)
Description:
- Inventory is an asset account. Since inventory sold is returned, and the inventory value increased. Hence, asset value is increased, and an increase in asset is debited.
- Cost of Goods Sold is an expense account. Since expenses decreased, equity value is increased, and an increase in equity is credited.
Note: Cost of goods sold value is $80
Prepare journal entry for the cash collected, on August 10.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 10 | Cash | 980 | |||
Sales Discounts | 20 | |||||
Accounts Receivable | 1,000 | |||||
(To record cash received for sales on account) |
Table (7)
Description:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Sales Discounts is a contra-revenue account, and contra-revenue accounts decrease the equity value, and a decrease in equity is debited.
- Accounts Receivable is an asset account. Since amount to be received has decreased, asset account decreased, and a decrease in asset is credited.
Working Notes:
Compute sales discount value.
Prepare journal entry for the inventory sold on account, on August 20.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 20 | Accounts Receivable | 300 | |||
Sales Revenue | 300 | |||||
(To record revenue earned on account for the goods sold) |
Table (8)
Description:
- Accounts Receivable is an asset account. Since amount to be received has increased, asset account increased, and an increase in asset is debited.
- Sales Revenue is a revenue account. Since revenues increase equity, equity value is increased. An increase in equity is credited.
Prepare journal entry for the cost of goods sold, on August 20.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
August | 20 | Cost of Goods Sold | 96 | |||
Inventory | 96 | |||||
(To record cost of inventory sold) |
Table (9)
Description:
- Cost of Goods Sold is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
- Inventory is an asset account. Since inventory is sold, and the cost of inventory sold is transferred to Cost of Goods Sold account, asset account decreased, and a decrease in asset is credited.
Prepare journal entry for the cash collected, on August22.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 22 | Cash | 400 | |||
Accounts Receivable | 400 | |||||
(To record cash received for sales on account) |
Table (10)
Description:
- Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- Accounts Receivable is an asset account. Since amount to be received has decreased, asset account decreased, and a decrease in asset is credited.
(2)
The net sales, cost of goods sold, and gross profit percentage for NG Spa
(2)
Explanation of Solution
Sales revenue: The amount of price of merchandise sold during a certain period is referred to as sales revenue. Net sales is the sales revenue, net of sales returns, sales allowances, and sales discounts.
Formula to compute net sales:
Sales returns and allowances: Sometimes, customers either return goods due to manufacturing defects, or accept to keep the defective goods for a reduction in sale price. That amount of goods returned, or reduced amount in sale price, is referred to as sales returns and allowances. These are recorded as contra-revenue accounts.
Sales discounts: The merchandisers offer a reduction in sales price on initial sales, to accelerate the sale on account payments, by their customers within the sale terms promptly. Such a reduction in sales price is referred to as sales discount. This is recorded as contra-revenue account.
Determine the net sales for NG Spa.
Details | Amount ($) |
Sales revenue from S World | $1,000 |
Sales revenue from R Cosmetics | 500 |
Sales revenue from MW | 300 |
Total sales revenue | 1,800 |
Less: Sales returns and allowances | (100) |
Less: Sales discounts | (20) |
Net sales | $1,680 |
Table (11)
Cost of goods sold: The amount of cost of merchandise sold during a certain period is referred to as cost of goods sold.
Determine the cost of goods sold for NG Spa.
Details | Amount ($) |
Cost of goods sold from S World | $650 |
Cost of goods sold from R Cosmetics | 400 |
Cost of goods sold from sales returns | (80) |
Cost of goods sold from MW | 96 |
Cost of goods sold | $1,066 |
Table (12)
Gross profit percentage: The percentage of gross profit generated by every dollar of net sales is referred to as gross profit percentage. The higher the ratio, the more ability to cover operating expenses.
Formula to compute gross profit percentage:
Determine gross profit percentage, if net sales is $1,680, and cost of goods sold is $1,066.
Gross profit represents the business profit earned from purchase and sale of merchandise. Gross profit percentage of 36.5% denotes that $0.365 of gross profit is obtained from the sale of one dollar of merchandise.
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Chapter 6 Solutions
EBK FUNDAMENTALS OF FINANCIAL ACCOUNTIN
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