The sales transaction has two parts. If a sales discount is awarded to customers for payment within a discount period after the purchase, debit cash for the invoice amount less the discount, debit sales discount for the discount amount, and credit accounts payable for the invoice amount. An additional entry is required to return merchandise to inventory, debit inventory and credit cost of goods sold. Adjusting entries are generally the same as for a service business. Additional adjustments are necessary for any inventory loss referred to as shrinkage.
Shrinkage is determined by comparing a physical count of the inventory with recorded quantities.
If the physical inventory is less than the recorded amount, debit Cost of Goods Sold, and Credit Inventory. These debit balance accounts are closed with the expense accounts to income summary. Acid-Test Ratio Used to assess the company's ability to settle its current debts with its existing assets. Calculated as Quick Assets divided by current liabilities. Quick assets are cash, short-term investments, and account receivables.