Overview of Financial Statements

Read each section in this chapter, which explains the purpose of the balance sheet, income statement, and the cash flow statement. It also is a guide to where you will find financials on publicly traded companies. You should get as much practice working on these statements as you can, since they are the fundamental information on any organization. Make the connections between each financial statement. The more you understand the connectivity of these statements, the better understanding you will have of how the entire accounting system works, which is important if you want to understand the overall operations of any company.

Special Considerations for Merchandising Companies

Recording Sales

Net sales are gross sales minus sales returns, sales allowances, and sales discounts.


Learning Objective

  • Differentiate between gross sales and net sales


Key Points

  • Sales returns, allowances and discounts are contra-revenue accounts.
  • In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as sales or net sales.
  • In financial ratios that use income statement sales values, "sales" refers to net sales, not gross sales.


Terms

  • gross sales
    The total invoice value of sales, before deducting customers' discounts, returns, or allowances.
  • net sales
    The value of sales generated by a company after deduction of returns, discounts, and the value of damaged or lost goods
  • sales returns and allowance
    a refund to customers for returned merchandise / credit notes or reductions in sales price for merchandise with minor defects agreed upon after the purchase
  • sales discount
    reduced payment from the customer based on invoice payment terms
  • sales invoice
    the seller's name for a commercial document issued by a seller to a buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer
  • double-entry bookkeeping
    A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts.


Example
  • 2/10, n/30 (2% discount if paid within 10 days, net invoice total due in 30 days).


In bookkeeping, accounting, and finance, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as sales or net sales.

In financial ratios that use income statement sales values, "sales" refers to net sales, not gross sales. Sales are the unique transactions that occur in professional selling or during marketing initiatives. The sales portion of an income statement for merchandising companies is figured as noted below:

Sales - Sales Return & Allowances - Sales Discount = Net sales


Sales

Net sales are operating revenues earned by a company for selling its products or rendering its services.

Revenue is earned when goods are delivered or services are rendered. In a marketing, advertising, or a general business context, the term "sales" often refers to a contract in which a buyer has agreed to purchase products at a set time in the future. From an accounting standpoint, sales do not occur until the product is delivered. "Outstanding orders" refers to sales orders that have not been filled.

A sale is a transfer of property for money or credit. In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account. The amount recorded is the actual monetary value of the transaction, not the list price of the merchandise. A discount from list price might be noted if it applies to the sale.

Fees for services are recorded separately from sales of merchandise, but the bookkeeping transactions for recording sales of services are similar to those for recording sales of tangible goods.


Gross sales and net sales

Gross sales are the sum of all sales during a time period. Net sales are gross sales minus sales returns, sales allowances, and sales discounts. Gross sales do not normally appear on an income statement. The sales figures reported on an income statement are net sales.