It is to be understood that, notwithstanding the fact that a concern selling goods has been selected as an illustration, the theory of accounting involved would apply in cases of concerns selling services, transportation, or what not.
A sale is a contract between two parties, wherein certain specified goods ready for delivery have been offered and accepted. A sale must, therefore, comply with the legal requirements of a contract. It is not necessary for payment to be made in order that a sale may take place. It is, of course, vitally important to the vendor that he receive pay for his goods, but for the purpose of this discussion the payment may be treated as a secondary matter. If there has been a meeting of the minds with regard to certain specified goods, and such goods are ready for delivery, the sale has taken place. The price attached to the goods fixes for the vendor the gross income from the sale. It will thus be seen that there is established an item called gross sales.
In certain instances, goods having been once sold are, for one reason or another, returned, and accepted by the vendor. This gives occasion for the account—returned sales or sales returns. Such items should be considered not as reducing the gross income from sales, but in effect a cancellation of the sales which were originally made. It would, accordingly, seem proper to deduct sales returns from gross sales and show the result as the net sales. Whether or not an account is raised on the ledger is immaterial; a caption for same should appear, however, in any comprehensive statement of income. If it were desired to have an account for net sales on the ledger, the account would be raised only at the time of the closing of the books, and would serve as a sub-group account.
The selling price of goods is composed of selling cost plus profit. Selling cost is made up not only of cost of goods before the expense of selling the goods, but the expense of administration and the expense of securing or protecting capital, and allowances or deductions which it will be necessary to make from the selling price of goods. The last named items include those previously mentioned, such as trade discounts, allowances, etc. These items appear to bear a close relation to the selling price, and, having been considered in fixing the selling price, and it having been conceded in advance that the selling price will be reduced to the extent of these deductions, it would appear logical to treat them as deductions from sales. It is immaterial whether or not such an account be maintained in the ledger, but if such were the case it would be set up only at the time of closing the books, and the items embraced in this sub-group closed into the account.
Trade discount is an expedient for adjusting a list price. To one customer the goods might be quoted at $2.00 a dozen, less 10 and 5; to another customer the price might be $2.00 a dozen, less 10 and 5 and 2. The same goods might be sold one year at $2.00 less 10; another year at $2.00 less Instead of raising
the list price the discount might be lowered. The question might be asked, “Why not change the list price instead of going to the extent of the trouble involved in changing a number of discounts?” The objection to this would probably be seen when it is realized that some concerns publish extensive and expensively illustrated catalogs and price lists. By changing the discounts it is not necessary to alter the catalogs or price lists. It will thus be seen that trade discount is a useful expedient for adjusting prices. The point especially to be kept in mind in this connection, however, is that the vendor concedes in advance, and takes into consideration in fixing his selling price, the fact that he will receive so much less for his goods. It has been argued by some authors that an account for trade discount has no place in the general ledger. The statement has even been made that such account is never found in the general ledger. It is modestly suggested by the author that if financial statements are to be comprehensive an account for trade discount might with propriety exist. It is conceded that most concerns deduct trade discount from the face of sales invoices and enter such invoices in their books net . To enter them broad would undoubtedly involve some additional work on the part of the bookkeepers. In a large concern, however, where a highly developed departmental organization exists, and the fixing of prices is delegated to the head of the sales department or the sales manager, an account for trade discount would undoubtedly serve as an index of the efficiency of the sales manager to a certain extent. It is questionable, of course, whether the expense involved in the additional work of recording the invoice broad would offset the benefits accruing to the administrative officers from the information furnished by the keeping of an account for trade discount. The practice to be followed should be guided entirely by a decision of this kind in each particular case. It is not possible to state a general rule concerning it.
Allowances may cover defective goods, or goods broken, damaged or lost in transit. Allowances have the effect of reducing the amount which will be received from the sale of goods, and will usually be deducted by the vendee in settlement . They are usually represented by credit memoranda, and on account of their close relation to sales, and the fact that they affect the amount which will be received from sales, they are treated as deductions from sales.
Rebates are of much the same nature as allowances. It may appear somewhat inconsistent to even mention the subject of rebates, since the practice of rebating is prohibited by law. The author respectfully refrains from offering any suggestions as to what should be done if rebates are actually found. It will suffice, perhaps, in connection with this topic, to state that rebates are, in effect, special allowances, and, if they exist, bear the same relation to sales that allowances bear.
Some explanation will, perhaps, be necessary as to the reason for treating outward freight as a deduction from sales. It is probable that the most common practice is to treat it as a selling expense. It seems, however, not to be properly included in such group if a sale is conceded to have taken place when the goods ready for delivery had been offered and accepted. The expense appears rather to be one of delivering the goods than selling them. It is argued by some that the matter of delivery is an important factor in determining the sale; that in certain instances it serves as an inducement to the purchaser; that many times, if the goods were not delivered by the vendor, they would not be sold. While this may be true, the fact still remains that if the vendor bears the expense of delivering the goods he receives that much less for his goods, and he has taken that fact into consideration in fixing his selling price.
Outward cartage is in the same class with outward freight. The account may contain merely items of expense in connection with services rendered by some drayman, or it may contain a proportion of the stable expenses, etc., of the concern which ships the goods. In a case of the latter kind the stable expense is divided by the tonnage hauled, and the rate thus obtained is multiplied by the number of tons involved in the outward cartage in order to obtain the amount applicable to outward cartage.
The relation of sales deductions to sales will be seen in the following tabulation:
Gross sales $100,000.00
Less sales returns 5,000.00
Net sales… $95,000.00
Deductions from sales:
Trade discount $10,000.00
Defective goods $100.00
Outward freight 3,000.00
Outward cartage 500.00
Total deductions from sales $16,500.00
Income from sales.., ,. $78,500.00
In closing the books, the various detail accounts will be closed into the group account, “income from sales,” which will in turn be closed into profit and loss.
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