ch.8 accounting for a merchandising business: sales … · ch.8 accounting for a merchandising...

Ch.8 Accounting for a Merchandising Business: Sales and Cash Receipts

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Procedures and forms used in selling merchandise

Credit sales

Sales Journal

Sales returns and allowances

Sales discounts

Posting procedure

Cash sales

Cash receipts journal and posting procedure

Accounts Receivable ledger & Schedule of Accounts Receivable

credit card sales*

Sales Activity • Just as a merchandising business follows certain procedures to

process and record purchases, they follow certain procedures to

process and record sales

• Procedures used depend on the business’s

Type

Size

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Terms of Payment

• Cash basis

No credit is allowed

Terms of sale are cash or net cash

• Credit period — a certain period of time in which to make payment

Terms of Payment • Revolving charge plan, in which customers pay

Percentage of their account Finance charges on a monthly basis

• n/EOM — payment for goods must be made by the end of the month in which the credit purchase was made

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Procedures for Credit Sales

The process for a sale on credit starts in one of two ways

• Receipt of a purchase order from a customer

• Preparation of a sales order by one of the firm’s salespersons

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A document prepared

when an order is

received from a

customer that serves as

an additional record of

the sale and identifies

the salesperson who

handled the sale.

Distribution of Sales Invoice Copies

• Credit department — approves sales order

• Billing department — prepares sales invoice and copies of sales invoice

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Procedures for Cash Sales

• Sales ticket or sales slip — a commonly used form for cash sales

• Cash register tape — a variation of the sales ticket

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The Sales Account

• A revenue account used to record the price of merchandise sold to customers

• A temporary account with a normal credit balance

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Recording Sales in General Journal Form

• Cash sales are recorded by

o Debiting Cash

o Crediting Sales

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+ asset

+revenue

• Credit sales are recorded by

o Debiting Accounts Receivable

o Crediting Sales

+ asset

+revenue

Sales Journal • A special journal used only to record credit sales of merchandise

• Has only one money column, entitled Accounts Receivable Debit and Sales Credit

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The Accounts Receivable Ledger

• An account for each credit customer

• Normal debit balances

• A subsidiary ledger with a controlling account — the Accounts Receivable account

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• Each sales journal entry is posted separately to the accounts receivable ledger.

• Posting is usually done on a daily basis.

Posting from the Sales Journal to the Accounts Receivable Ledger

Posting from the Sales Journal to the Accounts Receivable Ledger

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Posting from the Sales Journal to the General Ledger

At the end of the month

• The money column of the sales journal is totaled

• The total is posted twice, as a

Debit to the Accounts Receivable account

Credit to the Sales account

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Posting from the Sales Journal to the General Ledger

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Recording Sales Returns and Allowances

• A return results when a buyer returns part, or all, of a purchase to the seller.

• An allowance results when a buyer decides to keep damaged or defective goods, but at a reduction from the original price.

• On the books of the seller, a return or allowance is recorded as a reduction in sales revenue.

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Sales Returns and Allowances Account

• A contra revenue account • Has a debit balance that is opposite to the credit balance of the

Sales account

Contra

Credit Memorandum

Indicates that the seller has decreased the customer’s account and does not expect payment

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Sales Discounts Account

• Used to record cash discounts granted to credit customers for prompt payment

• A contra revenue account with a normal debit balance

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Cash Receipts Journal

• A special journal

• Where all transactions that increase the amount of cash are recorded

• Must contain a Cash Debit column

• Other columns may include

Sales Discount Debit column

Accounts Receivable Credit column

Sales Credit column

• A General Credit column for making credits to accounts for which no special column is provided

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The Cash Receipts Journal

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Posting the Cash Receipts Journal

Three types of postings made from the cash receipts journal

1. Amounts in Accounts Receivable Credit column posted separately to customers’ subsidiary ledger accounts

2. Amounts in General Credit column posted to the general ledger accounts identified in the Account Credited column

3. Special column totals posted to general ledger

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Schedule of Accounts Receivable

• Prepared after all posting has been completed

• To check posting accuracy

• Lists all of the balances in the accounts receivable ledger

• Schedule’s total compared with the balance of the Accounts Receivable controlling account in the general ledger

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Schedule of Accounts Receivable

The schedule total and the balance of the Accounts Receivable controlling account should agree.

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Accounting for Sales Taxes

• Most state governments and some county and city governments level a tax on the retail price of goods and services sold to the end user.

• The tax is called a sales tax and is collected from customers by the seller and later paid to the appropriate tax official in the state government.

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Sales Tax Payable account

• Liability account • Used to record sales taxes on retail purchases

+ asset

+revenue + liability

Recording Sales Tax in a Sales Journal

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Sales Returns Involving a Sales Tax

If a customer returns merchandise on which a sales tax was charged, the amount of sales tax must be returned to the customer.

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- asset

+ contra

revenue

- liability

Credit Card Sales: Three Types

Those issued by

• Banks (referred to as bank credit cards), such as VISA and MasterCard

• Private companies (referred to as nonbank credit cards) such as American Express and Diners Club

• Department stores and oil companies, such as Macy’s and ExxonMobil

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Recording Bank Credit Card Sales

• Recorded as cash sales because credit card receipts can be deposited in a bank immediately

• Discount (fee) that ranges from 3% to 7% deducted by bank

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• The discount is recorded in an expense account entitled Credit Card Expense.

• Credit Card Expense is an expense account that is used to record discounts paid when receipts for credit card sales are deposited with the bank that issued the card.

+ expense + revenue + liability

+ asset

Recording Private Company Credit Card Sales

An account entitled Accounts Receivable — Credit Card is used to record the amount due from nonbank credit card sales.

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+ asset

+ expense

+ revenue

+ liability

Review of Journals and Ledger

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The Controlling Account/Subsidiary Ledger Relationship

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Ch. 8 Appendix C:

The Perpetual Inventory System

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The periodic inventory system vs. the perpetual inventory system

Record merchandising transactions using the perpetual inventory system

Differences in a Periodic Inventory System and a Perpetual Inventory System

• Periodic Inventory System

Merchandise purchased recorded in the Purchases account

The cost of items unsold determined by a periodic inventory count, usually at the end of a month or year

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• Perpetual Inventory System

Accounting records maintained continuously

Records show the amount of inventory sold and on hand

Example

Recording Purchases of Merchandise

• Kathryn DeBice, owner of DeBice Home Products Company, purchases merchandise costing $800 on account on Jul. 15, 20XX.

• Kathryn records the following journal entry:

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20XX

Jul. 15 Merchandise Inventory 800

Accounts Payable 800

In a perpetual inventory system, the Merchandise Inventory account is increased when the inventory is purchased.

Recording Sales of Merchandise

In a perpetual inventory system, two entries are required when merchandise is sold.

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• The first entry records the sales price of the merchandise

Debit either Cash or Accounts Receivable

Credit Sales

• The second entry

Debit the Cost of Goods Sold account

Credit the Merchandise Inventory account

Example

Recording Sales of Merchandise

• Assume on Jul. 21, 20XX, Kathryn sells the inventory purchased on July 15 for $1,200 on account.

• Kathryn records the following two entries:

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20XX

Jul. 21 Accounts Receivable 1,200

Sales 1,200

Jul. 21 Cost of Goods Sold 800

Merchandise Inventory 800

Recording Returns of Merchandise Sold

Two entries are recorded when merchandise is returned by a customer.

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• The first entry, selling price of the merchandise

Debit the Sales Returns and Allowances account

Credit either Cash or Accounts Receivable

• The second entry, cost of returned merchandise

Debit Merchandise Inventory

Credit Cost of Goods Sold

Example

Recording Returns of Merchandise Sold

• On Jul. 24, a customer returns $1,200 of merchandise

purchased on account. The cost of the merchandise to DeBice Home Products was $800.

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20XX

Jul. 24 Sales Returns and Allowances 1,200

Accounts Receivable 1,200

Jul. 24 Merchandise Inventory 800

Cost of Goods Sold 800

Example

Recording Returns of Merchandise Purchased

• On Jul. 8, 20XX, DeBice Home Products returned for credit merchandise with a sales price of $25.

• DeBice records the following journal entry:

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20XX

Jul. 8 Accounts Payable 25

Merchandise Inventory 25

When merchandise is returned

Debit Cash or Accounts Payable

Credit Merchandise Inventory

Example

Recording Freight on Incoming Merchandise

• On Jul. 28, 20XX, DeBice purchased merchandise costing $1,200 and incurred a freight charge of $190 which was added to the invoice.

• DeBice records the following journal entry:

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20XX

Jul. 28 Merchandise Inventory 1,390

Accounts Payable 1,390

Because freight increases the cost of merchandise

Debit the Merchandise Inventory account

Credit Accounts Payable

Comparing the Periodic and Perpetual Inventory Systems

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Purchased $20,000 of merchandise on

account; terms 2/10, n/30.


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20XX

Jun.

20XX

Jun.


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20XX

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20XX

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20XX

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20XX

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20XX

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20XX

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20XX

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20XX

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20XX

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20XX

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20XX

Jun.

20XX

Jun.

The Merchandise Inventory Account Under a Perpetual Inventory System

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Purchases Journal

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• DeBice’s purchases journal under a perpetual inventory system follows:

• The only money column needed includes a debit to Merchandise Inventory and a credit to Accounts Payable:

Cash Payments Journal

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• DeBice’s cash payments journal under a perpetual inventory system follows:

• Notice the cash payments journal includes a Merchandise Inventory Credit column:

Sales Journal

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• DeBice’s sales journal under a perpetual inventory system follows:

• Notice the sales journal includes a Cost of Goods Sold Debit and Merchandise Inventory Credit column:

Cash Receipts Journal

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• DeBice’s cash receipts journal under a perpetual inventory system follows.

• Notice the cash receipts journal includes a Cost of Goods Sold Debit and Merchandise Inventory Credit column:

ch.8 accounting for a merchandising business: sales … · ch.8 accounting for a merchandising...

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