Question

Define the accounting transaction where merchandise is sold on account and the cost of merchandise sold decreases while recognizing prepaid freight (SP).

Answer 1

The accounting transaction involves selling merchandise on account while recognizing prepaid freight (SP). The cost of merchandise sold decreases while inventory is reduced. The accounting entry includes debits and credits for accounts receivable, sales, cost of goods sold, inventory, prepaid freight, and revenue.

Step-by-step explanation:

The accounting transaction being described here is the sale of merchandise on account while recognizing prepaid freight (SP). When merchandise is sold on account, it means that the customer does not make an immediate payment and instead agrees to pay at a later date. The cost of merchandise sold decreasing indicates that inventory is being reduced as items are sold.

Prepaid freight (SP) refers to the shipping costs associated with delivering the merchandise. By recognizing prepaid freight, the seller acknowledges that a portion of the revenue from the sale should be allocated to cover the shipping expenses.

For example, let's say a company sells $1,000 worth of merchandise on account. The cost of the merchandise sold is $600, which reduces the inventory. Additionally, they also recognize $100 in prepaid freight. The accounting entry for this transaction would be:

1. 
   
2. Debit Accounts Receivable: $1,000
3. 
   
4. Credit Sales: $1,000
5. 
   
6. Debit Cost of Goods Sold: $600
7. 
   
8. Credit Inventory: $600
9. 
   
10. Debit Prepaid Freight: $100
11. 
    
12. Credit Revenue: $100