Chapter 4, Problem 25E

To determine

Adjusting Entries:

The accounting entries which are passed at the end of an accounting period to change the closing balances of various general ledger accounts. They are made to align the reported results and financial position of the business in accordance with the accounting framework, such as GAAP or IFRS.

Sales Discount:

It is a type of cash discount which seller of the product gives on its sale of products. The seller of the product often refers to it as a sales discount.

Contra Asset:

It is a negative asset account which offsets the balance with the one it is paired. In other words it is a credit balance in the asset side as opposite to the natural one which is a debit balance.

Contra Liabilities:

It is a negative liability account which offsets the balance with the one it is paired. In other words it is a debit balance in the liability side as opposite to the natural one which is a credit balance.

a.

To prepare: Adjusting entries.

The adjusting entry for future sales discount:

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31	Sales discount		20
	Allowance for sales discount			20
	(To record expected sales discount)

Table(1)

• Sales discount is an expense account. Since it is given to the customers, means expense is increasing. Therefore, sales discount account is debited.
• Allowance for sales discount is a contra asset account. It will be set off against account receivables in future as it has credit balance. Therefore, allowance for sales discount is credited.

Working notes:

Computation of sales discount,

  $\begin{array}{c}\text{Future}\text{period}\text{discount}=\text{Account}\text{receivable}\times \text{Discount}\text{rate}\\ =\$1,000\times 2\%\\ =\$20\end{array}$

b.

To determine

To prepare: Adjusting entries.

c.

To determine

To identify: Allowance for sales discount is a contra asset or contra liability account.