Accounting for Merchandising Operations
To get Le Fleur’s Net Sales Revenue, the Gross Sales, the Sales amount not yet deducted with contra-Sales accounts, must be reduced by Sales Discounts and Sales Returns and Allowances. The former refers to the cash discounts given by Le Fleur to its customers who paid for their credits early.
The latter refers to the amount of merchandise returned by customers to Le Fleur for reasons like low quality, defects, and the like. In such a case, the Gross Revenue of E400, 000 must be deducted by the Sales Discounts and Sales Returns given with E4, 000 and E8, 000, respectively. The net result would be E388, 000, which is the Net Sales Revenue of Le Fleur. This will be the amount which should and which would cover for the cost of sales of the firm.
2. The Cost of Sales is the largest single expense of the business. It is the cost of inventory that Le Fleur has sold to its customers. This includes the inventories, the purchases of goods less the amount of discounts and returns, and the shipping cost. The amount of inventory at the beginning of the period is added to the Net Purchases to get the amount of Goods Available for Sale. The Net Purchases consists of the gross Purchases less Purchases Returns and Discounts, both contra-accounts to purchases, plus the transportation cost.
The concept of these two contra-accounts is similar to that of Sales Discounts and Returns, only on the point of view of Le Fleur as the supplies or inventory buyer. The Goods Available for Sale will then be reduced by the inventory at the end of the period, meaning the goods still left unsold. It will be deducted from such since the computation will be for the amount of goods already sold. As a result, the Beginning Inventory of E20, 000 is added to the Net Purchases [(E 250, 000 – 7, 000 – 3, 000) + 8, 000] of E248, 000, which resulted to the Goods Available for Sale, reduced by the Ending Inventory of E30, 000, obtaining the Cost of Goods Sold at E238, 000.
3. The Gross Profit, also known as the Gross Margin from Sales, is the amount which will cover the operating and other expenses of Le Fleur. Simply, Gross Profit is the difference between Net Sales Revenue and Cost of Goods Sold, thus, (E388, 000 – E238, 000) the Gross Profit of E150, 000.