Course Code: ACC 102

Module #11

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

Lesson title: Recognize discounts, returns and allowances Materials:

Lesson Objective: Module #11
Compute for discounts, returns and allowances on
merchandising transactions and prepare corresponding journal References:
entries. Fundamentals of Financial
Accounting and Reporting by
Win Ballada

Productivity Tip:
Having a hard time remembering some terms? Try using the active recall method, in which you
make flashcards, questions on the front and answers on the back, you test yourself, separating the
ones you got right and the ones you got wrong. You repeat the ones you got wrong until you get it
right.

A. LESSON PREVIEW/REVIEW
1) Introduction (2 mins)

Merchandise may be purchased and sold either on credit terms or for cash on delivery. When goods
are sold on account, a period of time called the credit period is allowed for payment. The length of the
credit period varies across industries and may even vary within an entity, depending on the product.

When goods are sold on credit, both parties should have an understanding as to the amount and time
of payment. These are usually printed on the sales invoice and constitute part of the sales agreement.
If the credit period is 30 days, then payment is expected within 30 days from the invoice date. The
credit period is usually described as the net credit period or net terms. The credit period of 30 days is
noted as “n/30”. If the invoice is due ten days after the end of the month, it may be marked “n/10 eom”.

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 Course Code: ACC 102
Module #11

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

2) Activity 1: What I Know Chart, part 1 (3 mins)

Try answering the questions below by writing your ideas under the What I Know column. You may use
key words or phrases that you think are related to the questions. Answer the What I learned section
after reading the Concept notes

What I Know Questions: What I Learned

Describe at least one
difference between Sales
Returns and Sales
Discounts.

What is cash discount?

What is FOB Shipping point?

B. MAIN LESSON
1) Activity 2: Pre-Printed Content Notes (13 mins)

Discounts may be categorized as follows:

a. Cash Discounts - are called purchase discounts from the buyer’s viewpoint, and sales discount
from the seller’s point of view. Trade discounts encourage the buyers to purchase products
because of markdowns from the list price.
b. Trade Discounts – encourages buyers to purchase products due to markdowns from the price
list.

Sales Discounts
Example: Assume that Sun Traders sold merchandise on June 20 for P5,000; terms 2/10, n/30. At the
time of sale, the entry is:
June 20 Accounts receivable 5,000
Sales 5,000

The customer may take advantage of the sales discount any time on or before June 30, which is 10 days
after the date of the invoice. If the customer paid on June 30, the entry is:
June 30 Cash 4,900
Sales discounts 100
Accounts receivable 5,000
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 Course Code: ACC 102
Module #11

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

Sales Returns and Allowances

Buyers may return goods to the seller for credit if the sale was made on account or for cash refund if
the sale was for cash. Each return or allowance is recorded as a debit to an account called sales returns and
allowances.

Example :
May 18 Sales returns and allowances 2,500
Accounts receivable (or Cash) 2,500
To record return or allowance on unsatisfactory merchandise.

Purchase Discounts
Merchandise purchases are usually made on credit and commonly involve purchase discounts for early
payments.

Example: Assume that Jedi Company purchased merchandise on March 10 for P6,000; terms 1/15, n/30. The
entry is:
March 10 Purchases 6,000
Accounts payable 6,000

If the company paid on March 20, the entry is:

March 20 Accounts payable 6,000

Purchase discounts 60
Cash 5,940

Purchases Returns and Allowances

Sales Returns and Allowances in the seller’s books are recorded as Purchase Returns and Allowances
in the books of the buyer.

Example:
Nov. 18 Accounts payable 2,500
Purchase returns and allowances 2,500
To record return of damaged merchandise purchased on Nov. 2.

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 Course Code: ACC 102
Module #11

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

2) Activity 3: Skill-building Activities (with answer key) (18 mins + 2 mins checking)

Directions: Encircle the letter of the correct answer.

1. The entry to record a sale of P7,500 with terms of 2/10, n/30 would include a
a. Debit to Sales Discounts for P150.
b. Debit to Sales for P7,350.
c. Credit to Accounts Receivable for P7,500.
d. Credit to Sales for P7,500.

2. The collection of a P4,000 accout within the 2% discount period would result in a
a. Debit to Sales Discounts for P80.
b. Debit to Accounts Receivable for P3,920.
c. Credit to Cash for P3,920.
d. Credit to Accounts Receivable for P3,920.

3. The collection of a P5,000 account beyond the 2%discount period would result in a
a. Debit to Cash for P4,900.
b. Credit to Accounts Receivable for P5,000.
c. Credit to Cash for P5,000.
d. Debit to Sales Discount for P100.

4. Goods totaling P50,000 were purchased February 2 with terms of 2/10, n/30. Returns
of P10,000 were made on February 10. How much discount, if any, can be availed if
the invoice was paid on February 12?
a. None
b. P1,000
c. P 800
d. P 200

5. The entry to record a payment on a P15,000 account within the 2% discount

period would include a
a. Debit to Cash for P15,000.
b. Debit to Accounts Payable for P14,700.
c. Credit to Purchase Discounts for P300.
d. Credit to Accounts Payable for P15,000.

6. A P5,000 purchases on account was made. The entry to record the payment on
account after the expiration of the 2% discount period would include a
a. Debit to Accounts Payable for P5,000.
b. Debit to Purchase Discounts for P100.
c. Credit to Cash forP4,900.
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 Course Code: ACC 102
Module #11

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

d. Credit to Accounts Payable for P4,900.

7. A buyer received an invoice for P6,000 dated June 10. If the terms are 2/10, n/30
and the buyer paid the invoice within the discount period, what amount will the
seller receive?
a. P6,000
b. P5,880
c. P4,800
d. P 120

8. The purchase discounts account is a contra account to

a. Accounts Payable
b. Sales
c. Purchases
d. Sales Discount

9. The account that appears in the chart of accounts for a merchandising entity but not
for a service entity is

a. Accounts receivable
b. Advertising expense
c. Sales returns and allowances
d. Service revenue

10. Grace Company bought merchandise for P8,000, terms 2/10, n/30. If Grace
returns P2,000 of the goods to the vendor, the entry to record the return should
include a

a. Debit to Accounts Payable of P2,000.

b. Debit to Discounts Lost of P40.
c. Credit to Purchase Returns and Allowances of P1,960.
d. Debit to Purchase Returns and Allowances of P1,960.

3) Activity 4: What I Know Chart, part 2 (2 mins)

Now, I really would like to discover What You Know NOW by referring to the third column of the
Chart contained in your Activity 1.

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 Course Code: ACC 102
Module #11

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

4) Activity 5: Check for Understanding (5 mins)

Directions: Write True if the statement is correct; False if incorrect.

_______ 1. Cash discounts are called purchase discounts from the buyer’s point of view.
_______ 2. The sales discounts account is a contra-income account and will have a debit balance.
_______ 3. A credit term of “2/10, n/30” means that the buyer may deduct 2% from the invoice if
payment is made within 10 days from the end of the month.
______ 4. Purchase returns and allowances is a deduction from purchases.
______ 5. When the terms of the sale include a sales discount, it is usually advisable for the buyer to
pay within the discount period.
______ 6. The terms2/10, n/30 mean that a 2% discount is allowed on payments made over 10 but
before 30 days after the invoice date.
______ 7. The entry to record the return of goods from a customer would include a credit to Sales
Returns and Allowances.
______ 8. The entry to record a sale of P7,500 with terms of 2/10, n/30 would include a credit to Sales
for P7,500.
______ 9. The collection of a P4,000 account within the 2% discount period would result in a credit to
Accounts Receivable for P3,920.
______ 10. The collection of a P5,000 account beyond the 2% discount period would result in a debit
to Sales Discounts for P100.

A. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5 mins)
Congratulations for finishing this module! Shade the number of this module that you have finished.

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 Course Code: ACC 102
Module #11

Name: _____________________________________ Class number: _________________

Section: _________ Schedule: _________________ Date: ________________________

b) Think about your learning by filling up your “My Learning Tracker” below. Write your learning targets,
your scores, and learning experience for this session and deliberately plan for our next learning
session.

Date Learning Target/Topic Scores Action Plan

What module# did you do? What What contributed to the quality of your performance today?
What’s the date What were your scores
were the learning targets? What What will you do next session to maintain your performance or
today? in the activities?
activities did you do? improve it?

KEY TO CORRECTION

Activity 3:
1. D 6. A
2. A 7. B
3. B 8. C
4. C 9. C
5. C 10. A

Activity 5

1. True
2. True
3. False – 10 days from the invoice date
4. True
5. True
6. False – within 10 days
7. False – should be debit
8. True
9. False – accounts receivable will not be affected by the discount. Amount is still P4,000
10. False – no sales discount should be recorded if the payment is beyond the discount period

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