5. Price corrections.—Any adjustments that must be made because of errors in invoicing goods or billing out at erroneous prices should be corrected by debiting or crediting the sales account, and crediting or debit ing the account of the customer according to the char acter of the error. The correction of mathematical errors is to be distinguished from allowances made to customers because of claims for damages, or short weight, and the like. When a customer has received an allowance or a price concession of this nature, the amount should be debited to a sales allowance account. This is for the purpose of establishing a better con trol over allowances of this character which would otherwise be lost sight of if merged with the gross sales.
6. Sales returns.—In some lines of business, the item of sales returns is an important one. Business men everywhere are trying to minimize this evil. In order that control may be established over items of this character so that the management may know at the end of the period what the relation is between sales and returns, all goods returned by customers should be debited to a sales returns account, and not to the gross sales account. It will thus be possible, at the end of the fiscal period, to determine just what pro portion of sales are returned, and whether the evil is increasing or decreasing. A further analysis may be made to determine the amount of returns in each salesman's territory, as some salesmen will oversell their trade.
7. Prepaid charges treated as houses in some cases are accustomed to prepay freight, insurance and cartage, for the accommoda tion of customers, charging the amounts of these items in the invoice with the goods shipped. In many instances, these charges to customers are credited in their entirety to the sales account. This is bad prac tice, because it overstates the amount of the sales. The amounts charged to a customer for freight, in surance and cartage prepaid should be offset against the expense of the shipper in that connection. The sales account should not be credited with these amounts.
8. Sales of scrap or of scrap ma terial, or of by-products, should not be credited to the regular sales account, but should be handled thru special acounts created for them. Against the income received from the sales of scrap or residuals should be offset the cost thereof, and the net profit from the transactions should be taken into the income account as an item of miscellaneous income.
As has already been pointed out in the Text on "Accounting Practice," sales to branches, or transfers of merchandise among departments, should not be included in the sales account. The reader is referred to that volume for the detailed treatment to be given to transactions of this nature.
9. Percentage gross sales, there fore, as reduced by the amount of returns and allow ances, constitute net sales. This is the amount which should be used as the base for all percentage calcula tions that are made on the basis of selling price. In this connection, it is pertinent to say that while prob ably the majority of business undertakings make the percentage calculations in the income account by using net sales as a basis, it is mathematically more correct to use the cost of goods sold or the cost of service ren dered as a basis. One method is just as good as the
other, as long as it is borne in mind that whatever basis is used, it must be consistently employed thru out. One must understand thoroly, however, whether the basis is cost of sales or selling price.
The reader may have noticed literature that ap peared from time to time on the subject of percentage of profits, some authors insisting that but one of the methods of figuring the percentage of profit is correct, and others taking the opposing view. The impor tant point that many authors overlook is that when the selling price is taken as the base, the base will vary with the profits, since the latter are included in it. Yet it is recognized that the chief reason for making comparisons by means of percentages is to reduce the results to a common base.
To quote from Dawson's Compendium; This variation is, moreover, uncontrolled by any principle, being, in fhe case of a large proportion of profit, entirely disproportionate to the variation caused by a smaller rate of profit. As an instance, 10 per cent of profit computed upon the cost price is equal to 934i per cent when the same result is taken on the selling price, but if 50 per cent of profit on cost prices be computed upon selling prices it will only show 33% per cent. Furthermore, as the sale price is com posed of the cost price and the profit, the latter cannot ex ceed the sale price, from which it follows that a profit based upon selling prices cannot exceed 100 per cent, nor even equal 100 per cent, if the goods have cost anything at all. None of these impurities or limitations exist in connection with a cost price percentage. Of course, a given percentage computed upon the cost will' always show a certain other percentage if the same result as regards profits is computed upon selling prices, i.e., 10 per cent based upon cost is at all times equivalent to 9Yn. per cent of the selling price: 50 per cent of cost is always equal to 33% per cent of sale price, and so on : Therefore, so long as the rate of profit is under 25 per cent, and does not vary greatly, comparisons of results based on selling prices will not be as misleading as they would be otherwise, and may be adopted without great danger, provided the nature of the base upon which they are computed is always borne in mind. It is often urged. that a sale price percentage is adopted on the score of con venience, the cost of the articles being difficult to ascertain on account of the difference of stocks and other obscuring elements. But the cost incurred in respect of the sales ef fected can be obtained by a simple expedient as soon as the amount of profit has been ascertained. As above stated, the cost and profit combined equal the selling price—therefore, if the amount of profit be deducted from the net sales, the cost of the goods sold must be the result, quite independently of the questions of purchases, differences of stocks, etc.