A merchandiser records sales at the invoice price (using the gross method). The cost of items sold is transferred from Merchandise Inventory to Cost of Goods Sold. When cash discounts from the sales price are offered and customers pay within the discount period, the seller records this in Sales Discounts, a contra account to Sales. Refunds or credits given to customers for unsatisfactory merchandise are recorded in Sales Returns and Allowances, a contra account to Sales.

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Knowledge Check 01 A seller uses a perpetual inventory system, and on April 18, a customer discovers that merchandise previously purchased is defective. The buyer decides to keep the defective merchandise and the seller allows a $15 price reduction, paid in cash to the buyer. Complete the journal entry to record the allowance granted to the buyer by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

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