Think of a lemonade stand:
You sell lemonade for $1 per cup → Sales revenue
It costs you 30¢ per cup (lemons, sugar, cups) → COGS
The leftover 70¢ is gross profit.
📘 Formula:
Gross Profit = Net Sales - COGS
This is critical—it shows how much money is left after paying for the products you sold, before covering things like salaries or rent.
🛒 Sales of Merchandise (Double Entry)
Every merchandise sale includes two separate journal entries:
Revenue Side (Asset Increase)
Accounts Receivable 1,000
Sales Revenue 1,000
Cost Side (Asset Decrease)
Cost of Goods Sold 300
Merchandise Inventory 300
You sell a bicycle for $1,000 that cost you $300.
You gain $1,000 in future payments.
You lose an asset (the bike) worth $300.
Your profit = $700, but that shows up as net income after expenses.
🏷️ Sales Discounts (Cash Discounts)
These are incentives to customers: "Pay early, and we’ll reduce the price."
📘 Example: 2/10, n/30
Get 2% off if paid in 10 days; otherwise, full amount due in 30 days.
A café offers you 50¢ off your $5 coffee if you pay cash today instead of starting a tab and paying later.
Accounting Note: The discount is recorded in a contra-revenue account, meaning it reduces total sales.
Speeds up cash flow
Helps avoid collection issues
📉 Sales Returns and Allowances
These are reductions in revenue when:
Customers return goods
Customers keep defective goods but demand a price reduction
📘 Entry Example:
Sales Returns and Allowances (Debit)
Accounts Receivable (Credit)
Customer returns a faulty phone. Either you:
Take it back (a return),
Or let them keep it with a $100 discount (an allowance).