Skip to content
Study Hall
Lesson 3 of 13The Accounting Cycle: Merchandising Business
Unit 3 · Lesson 3 of 13

The Sales Account

Selling merchandise is the mirror image of purchasing it: a Sales account, contra accounts for returns and discounts on the customer side, and Delivery Expense for freight the seller pays out.

2 min read7 practice questionsAsk AI about this →

Key things to remember

  1. 1Sales (credit balance) records the selling price of merchandise sold.
  2. 2Sales Returns and Allowances (debit, contra-revenue) records customer returns and price allowances.
  3. 3Sales Discounts (debit, contra-revenue) records the discount given for early customer payment.
  4. 4Net Sales = Sales − Sales Returns and Allowances − Sales Discounts.
  5. 5Delivery Expense (seller's outgoing freight) is an operating expense, never part of Cost of Goods Sold.

Every purchase transaction you just studied has a matching sale on the other side of the counter. When Bramwell Hardware buys from its supplier, the supplier is recording a sale. The Sales account is the revenue account that records the selling price of merchandise sold to customers — for cash or on account. Like any revenue account, Sales carries a credit balance and increases owner's equity.

Sales invoices and credit sales

When merchandise is sold on account, the seller prepares a sales invoice — the bill completed by the seller and given to the buyer as a record of a credit sale. It lists the items, quantities, prices, credit terms, and any sales tax. That same document is the buyer's purchase invoice — one document, two names, depending on which side of the transaction you are standing on.

Sales Returns and Allowances

Sales Returns and Allowances is used by the seller to record merchandise returned by a customer (or a price allowance granted on goods the customer keeps). It is a contra-revenue account with a debit balance, subtracted from Sales when Net Sales is calculated. The seller documents the reduction with a credit invoice — a source document issued by the seller to indicate the amount of credit allowed to a customer for returned or defective goods. Credit invoice, credit memorandum, and credit note are three names for the same document.

Sales Discounts

Sales Discounts are offered to encourage early payment of customer account balances — they are the seller's side of the same 2/10, n/30 terms studied in the Purchases topic. Sales Discounts is a contra-revenue account (debit balance) that reduces Sales when the customer pays promptly.

Delivery Expense

Delivery Expense is used to record the cost of delivering merchandise to customers — freight the SELLER pays to ship goods out. It is an operating expense on the income statement, not part of Cost of Goods Sold, because it is the cost of getting the sale to the customer, not the cost of acquiring the merchandise in the first place.

Account typeIncreases withDecreases withNormal balanceAssetDebitCreditDebitLiabilityCreditDebitCreditOwner's EquityCreditDebitCreditRevenueCreditDebitCreditExpenseDebitCreditDebit
Fig 1Sales and its contra-revenue accounts follow the revenue debit/credit rules in reverse
Same transaction, two sides
Purchases/Purchases Returns and Allowances/Purchases Discounts/Transportation-in on the buyer's books line up exactly with Sales/Sales Returns and Allowances/Sales Discounts/Delivery Expense on the seller's books. Learning one side well makes the other side almost free.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
On March 3, Harbourview Sports sells $2,000 of merchandise on account, terms 2/10, n/30. On March 8 the customer returns $200 of defective goods, receiving a credit invoice. On March 12 the customer pays the remaining balance. Journalize the March 12 payment and state how much cash is received.
Example 2
A store's income statement shows Sales $310,000, Sales Returns and Allowances $8,500, and Sales Discounts $3,200. Calculate Net Sales.

Where marks get lost

  • Crediting Sales Returns and Allowances instead of debiting it — it is a contra-revenue account and normally has a DEBIT balance.
  • Calculating the sales discount on the original invoice amount instead of the balance remaining after any returns.
  • Recording Delivery Expense as part of Cost of Goods Sold — it belongs in operating expenses, since it is the cost of shipping OUT, not the cost of the goods themselves.
  • Mixing up who issues the credit invoice — the SELLER issues it to the buyer; the buyer does not create it.
  • Forgetting that Sales Returns and Allowances and Sales Discounts both reduce Net Sales, not gross Sales on the general ledger balance itself.

Flashcards 6

Sales
Sales Returns and Allowances
Credit Invoice (credit memorandum)
Sales Discounts
+ 2 more

Practice

1
Sales $145,000; Sales Returns and Allowances $6,000; Sales Discounts $1,800. Find Net Sales.
$
2
Which account normally carries a debit balance?
3
What is the seller's name for the source document a customer receives listing a credit sale?
4
A $5,000 credit sale, terms 2/10, n/30, has $400 returned before payment. The customer pays within the discount period. How much cash does the seller receive?
$
5
Delivery Expense belongs on the income statement as:
6
Match the buyer-side account to its seller-side equivalent.
Purchases
Purchases Returns and Allowances
Purchases Discounts
Transportation-in
7
Is Sales Discounts a contra-revenue account or an expense account?

Spot a mistake on this page? Let us know