Accounts: Their Construction and Interpretation for Business Men and Students of Affairs

By William Morse Cole | Go to book overview

CHAPTER TWENTY-ONE
SOME MISCELLANEOUS APPLICATIONS OF GENERAL PRINCIPLES

I. The Treatment of Commercial Discounts

THE common method of treating discount allowed for early payment of bills is to debit an account called Merchandise Discount and credit the customer. Conversely, for all discounts taken on purchases it is common to credit Merchandise Discount and debit the firm from which the purchase was made. In the end, Merchandise Discount is commonly closed out into Merchandise. The result of this method is to show the actual occurrence so far as things appear on the surface,--that is, to charge merchandise account for the actual net payment for merchandise bought and credit that account for the net amount received on merchandise sold. This appears to be a desirable thing. As we saw in discussing the main principles of the balance sheet, however, it is likely to happen that the worse the credit of the concern buying goods, the higher will appear the value of its merchandise on the books. If, that is to say, a concern has such poor credit that it can pay its bills only at the last moment, it is paying the maximum price and its merchandise account is debited for that price. A concern with good credit and good management, on the other hand, will always take the highest discount offered and will have a correspondingly low valuation for merchandise. The same goods, bought from the same dealer, on the same offered terms, will have a higher book value for a poor concern than for a good one. This exposes at once the objection to allowing Merchandise to be affected in any way by discounts. If the terms offered on a bill of goods are 6% in ten days, 5% in thirty days, and net sixty days, it is obvious that a man who pays his bill in ten days is paying much more nearly the real cost of the merchandise than the man who pays his bill at the end of the sixty days. The cost of manufacturing and distributing the goods sold to the sixty-day man is no greater than that of the goods sold to the ten-day man.

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