Sales consist of the gross return on the sale of commercial goods, less cash and trade discount allowed and returns from customers.
1. Discount allowed
It is important from a management point of view to distinguish between Cash Discount and Trade Discount as well as their departmental division. The two concepts have already been discussed in section 5.1 (1) & (2). These types of discounts therefore have a direct influence on the gross profit of a commercial enterprise.
There are different types of discount which may be granted in practice.
1.1 Cash discount
This includes the total discount allowed on all cash transactions. Departmental analysis of the discount is advised in order to determine the extent before deducting it from the gross sales.
1.2 Trade discount
This includes the total discount allowed on all trade transactions. Departmental analysis is advised to determine the extent of the trade discount before deducting it from the gross sales.
1.3 Settlement discount allowed
Since this discount is allowed only once a transaction is being settled it is not part of the gross profit calculation, but is regarded as a financing cost item. The discount therefore does not influence the gross profit of an enterprise.
a. Returns from customers
This includes the total returns from customers. A departmental analysis is advised in order to determine its extent before deducting it from the gross sales. A deviation from the normal ratio to total sales could be an indication of ineffectiveness within a specific section. This is also known as Sales returns in certain business sectors.
Returns such as these result in the fact that the sales must be decreased even further since the goods are back in stock, in other words they are included in the Closing stock at the end of an accounting period.
b. Net sales (turnover)
Sales consists of cash and credit sales, therefore the gross return of the sale of a commercial enterprise less returns from customers and trade and cash discounts allowed. This is known as Net sales or Turnover.
Purchases consist of the gross purchases of merchandise less cash and trade discount received and returns to suppliers.
a. Discount received
This type of discount has a direct influence on net purchases, the cost of stock purchased, the cost of sales and the gross profit of a commercial enterprise.
Settlement discount received is excluded from the latter since the discount is claimed only once the settlement of a transaction or account takes place. It therefore does not form part of the gross profit calculation and is considered to be a finance income item. The discount therefore does not influence an enterprise’s gross profit.
b. Returns to suppliers
This includes the total returns to suppliers. A departmental analysis of this is advised in order to determine its extent before deducting it from the gross purchases. A deviation from the normal ratio to total purchases could indicate ineffectiveness within a specific division.
Such returns result in purchases having to be decreased even more since the goods are out of stock and have not been received. As a result of the returns, the total cost price for a particular consignment or the cost of sales is influenced.
c. Net purchases
Purchases consist of cash and credit purchases, total gross purchases less returns to suppliers and trade and cash discounts received. This is known as Net purchases.