ESSENTIAL KNOWLEDGE

The merchandising entity (or in layman’s term buy and sell) buys goods and the goods are
sold in the same form. So, from cash the entity the buy goods, then sell the goods then
back to cash-this cycle continues during the lifetime of the business. For cash sales, the
cycle is from cash to inventory and back to cash.

Cash

Purchases
Cash sales

Inventory

For sales on account, the cycle is from cash to inventory to accounts receivable and back to cash.
The shorter the cycle the better is the business operations. The faster the sale of merchandise
and the collection of cash, the more profits the entity generates. The term use in accounting to
describe movement of merchandise/inventory is called inventory turn-over.
Cash

Purchases
Acct. Rec’ble

Inventory

The graphical presentation shows the operating cycle of a merchandising concern. Cash Sales has
shorter operating cycle compared with sales on account or on credit.

How to compute cash discounts?

When the term of the sale is express in this manner “2/10, n/30” this means that the credit
period is 30 days. If the customer/buyer will pay the account within 10 days a 2% discount is
granted.

Example. On March 1, 2020 L Enterprise sold merchandise to M company for P20,000 terms 2/10,
n/30.

If the customer M will pay within March 10, say March 8, an amount equal to 2% of P20,000 or
P400 shall be given as a discount, therefore customer M will only pay P19,600 to the vendor.

This is very clear that cash discounts can only be availed to sales on credit. Cash sales has no cash
discounts because it is already paid in cash. Then what do you call discounts availed on cash sales,
it is trade discount which is discuss in the next topic.