Professional Documents
Culture Documents
Normal
Balance
CR
DR
Purpose of account
Sales discounts
DR
Cost of Goods
Sold
Delivery
expense
DR
DR
FOB Shipping Point: legal title to the goods passes to the buyer when the goods are
shipped. The buyer pays freight. Buyer assumes risk of loss. If terms are FOB shipping,
then the buyer charges the shipping costs to the merchandise inventory account.
FOB Destination: legal title to the goods passes to the buyer when the goods reach the
buyers place of business. The seller pays shipping and bears risk of loss. If terms are
FOB Destination, the seller uses Delivery Expense to record the shipping cost.
Discounts for prompt payment cannot be taken on freight.
Cr.
Sales
Merchandise inventory
Accounts Receivable
Sales returns from customers. Two entries are recorded: the sales return and the receipt of the
goods from the customer.
Dr. Sales returns and Allowances
Cr.
Accounts Receivable
COGS
Gross profit
computation
Income from
Operations
computation
Nonoperating
activities
computation
The acid-test ratio is a stricter, more conservative version of the current ratio. The formula for the
acid-test ratio follows.
Acid Test Ratio = Cash and cash equivalents + Short Term Investments + A/R
Current Liabilities
The gross margin ratio calculates the gross profit earned on each dollar of sales. The formula for
the gross margin ratio is below.