Ch.8 Accounting for a Merchandising Business: Sales and Cash Receipts 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* 1
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 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 2
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 3
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 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. 4
Distribution of Sales Invoice Copies Credit department approves sales order Billing department prepares sales invoice and copies of sales invoice 5
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 6
The Sales Account A revenue account used to record the price of merchandise sold to customers A temporary account with a normal credit balance 7
Recording Sales in General Journal Form Cash sales are recorded by o Debiting Cash o Crediting Sales + asset +revenue Credit sales are recorded by o Debiting Accounts Receivable o Crediting Sales + asset +revenue 8
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 9
The Accounts Receivable Ledger An account for each credit customer Normal debit balances A subsidiary ledger with a controlling account the Accounts Receivable account Posting from the Sales Journal to the Accounts Receivable Ledger Each sales journal entry is posted separately to the accounts receivable ledger. Posting is usually done on a daily basis. 10
Posting from the Sales Journal to the Accounts Receivable Ledger 11
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 12
Posting from the Sales Journal to the General Ledger 13
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. Sales Returns and Allowances Account A contra revenue account Has a debit balance that is opposite to the credit balance of the Sales account 14 Contra
Credit Memorandum Indicates that the seller has decreased the customer s account and does not expect payment 15
Sales Discounts Account Used to record cash discounts granted to credit customers for prompt payment A contra revenue account with a normal debit balance 16
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 17
The Cash Receipts Journal 18
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 19
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 20
Schedule of Accounts Receivable The schedule total and the balance of the Accounts Receivable controlling account should agree. 21
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. Sales Tax Payable account Liability account Used to record sales taxes on retail purchases + asset + liability +revenue 22
Recording Sales Tax in a Sales Journal 23
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. + contra revenue - liability - asset 24
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 25
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 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. + asset + expense + revenue + liability 26
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. + asset + expense + revenue + liability 27
Review of Journals and Ledger 28
The Controlling Account/Subsidiary Ledger Relationship 29
Ch. 8 Appendix C: The Perpetual Inventory System The periodic inventory system vs. the perpetual inventory system Record merchandising transactions using the perpetual inventory system 30
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 Perpetual Inventory System Accounting records maintained continuously 31 Records show the amount of inventory sold and on hand
Example Recording Purchases of Merchandise In a perpetual inventory system, the Merchandise Inventory account is increased when the inventory is purchased. Kathryn DeBice, owner of DeBice Home Products Company, purchases merchandise costing $800 on account on Jul. 15, 20XX. Kathryn records the following journal entry: 20XX Jul. 15 Merchandise Inventory 800 Accounts Payable 800 32
Recording Sales of Merchandise In a perpetual inventory system, two entries are required when merchandise is sold. 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 33
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: 20XX Jul. 21 Accounts Receivable 1,200 Sales 1,200 Jul. 21 Cost of Goods Sold 800 Merchandise Inventory 800 34
Recording Returns of Merchandise Sold Two entries are recorded when merchandise is returned by a customer. 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 35
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. 20XX Jul. 24 Sales Returns and Allowances 1,200 Accounts Receivable 1,200 Jul. 24 Merchandise Inventory 800 Cost of Goods Sold 800 36
Example Recording Returns of Merchandise Purchased When merchandise is returned Debit Cash or Accounts Payable Credit Merchandise Inventory On Jul. 8, 20XX, DeBice Home Products returned for credit merchandise with a sales price of $25. DeBice records the following journal entry: 20XX Jul. 8 Accounts Payable 25 Merchandise Inventory 25 37
Example Recording Freight on Incoming Merchandise Because freight increases the cost of merchandise Debit the Merchandise Inventory account Credit Accounts Payable 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: 20XX Jul. 28 Merchandise Inventory 1,390 Accounts Payable 1,390 38
Comparing the Periodic and Perpetual Inventory Systems Purchased $20,000 of merchandise on account; terms 2/10, n/30. 39
Comparing the Periodic and Perpetual Inventory Systems 20XX Jun. 20XX Jun. 40
Comparing the Periodic and Perpetual Inventory Systems 20XX Jun. 20XX Jun. 41
Comparing the Periodic and Perpetual Inventory Systems 20XX Jun. 20XX Jun. 42
Comparing the Periodic and Perpetual Inventory Systems 20XX Jun. 20XX Jun. 43
Comparing the Periodic and Perpetual Inventory Systems 20XX Jun. 20XX Jun. 44
Comparing the Periodic and Perpetual Inventory Systems 20XX Jun. 20XX Jun. 45
Comparing the Periodic and Perpetual Inventory Systems 20XX Jun. 20XX Jun. 46
The Merchandise Inventory Account Under a Perpetual Inventory System 47
Purchases Journal 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: 48
Cash Payments Journal DeBice s cash payments journal under a perpetual inventory system follows: Notice the cash payments journal includes a Merchandise Inventory Credit column: 49
Sales Journal 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: 50
Cash Receipts Journal 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: 51