7-1

Chapter

7

Skyline College

7-2

The three types of business operations are:The three types of business operations are:

A service business is a business that sells services.

A merchandising business is a business that sells goods purchased for resale.

A manufacturing business is a business that sells goods that it has produced.

7-3

Meet The Style ShopMeet The Style Shop

The Style Shop is a retail business that sells the latest fashion clothing. A retail business sells directly to individual customers.

The Style Shop must account for the purchases and sales of goods and for Merchandise inventory .

Merchandise inventory is the stock of goods a merchandising business keeps on hand to sell

7-4

Special Journals and Subsidiary Ledgers

Allow for efficient recording of financial data, the accounting systems of most businesses include special journals and subsidiary ledgers

A special journal is a journal used to record only one type of transaction.

A subsidiary ledger is a ledger dedicated to accounts of a single type.

7-5

Journal Flow Chart

Does the transaction involve cash?

YES

Was cash RECEIVED?

YES NO

Record thetransaction in

the CASHRECEIPTS

(CRs) Journal

Use the CRs and CDs Journals to preparethe monthly Bank Reconcilation

Record thetransaction in

the CASHDISBURSEMENTS

(CDs) Journal

NO

Was inventory PURCHASED?

YES NO

Record thepurchase in

the PURCHASES Journal (PJ)

Was it a credit SALE?

YES NO

Record theTransaction

in theSALES

Journal (SJ)

Record theTransaction

In theGENERALJournal (GJ)

7-6

Journals Used by Merchandising Businesses

Journals Used by Merchandising Businesses

Sales

Purchases

Cash receipts

Cash payments

General

To record sales of merchandise on credit

To record purchases of merchandise on credit

To record cash received from all sources

Type of Journal Purpose

To record all disbursements of cash

To record all transactions that are not recorded in another special journal and all adjusting and closing entries

7-7

Ledgers Used by Merchandising Businesses

Ledgers Used by Merchandising Businesses

General

Accounts receivable

Accounts payable

Assets, liabilities, owner’s equity, revenue, and expense accounts

Accounts for credit customers

Accounts for creditors

Type of Ledger Content

7-8

ASSETS101 Cash

105 Petty Cash Fund

109 Notes Receivable

111 Accounts Receivable

112 Allowance for Doubtful Accounts

116 Interest Receivable

121 Merchandise Inventory

126 Prepaid Insurance

127 Prepaid Interest

129 Supplies

131 Store Equipment

132 Accumulated Depreciation - Store Equip.

141 Office Equipment

142 Accumulated Depreciation - Office Equip.

LIABILITIES201 Notes Payable — Trade

202 Notes Payable — Bank

205 Accounts Payable

216 Interest Payable

221 Social Security Tax Payable

222 Medicare Tax Payable

223 Employee Income Tax Payable

225 Federal Unemployment Tax Payable

227 State Unemployment Tax Payable

229 Salaries Payable

231 Sales Tax Payable

OWNER’S EQUITY301 Mary Amos, Capital

302 Mary Amos, Drawing

399 Income Summary

REVENUE401 Sales

451 Sales Returns and Allowances

491 Interest Income

493 Miscellaneous Income

The Style Shop Chart of Accounts

COST OF GOODS SOLD501 Purchases

502 Freight In

503 Purchases Returns and Allowances

504 Purchases Discounts

EXPENSES611 Salaries Expense - Sales

612 Supplies Expense

614 Advertising Expense

617 Cash Short or Over

626 Depreciation Expense - Store Equipment

634 Rent Expense

637 Salaries Expense - Office

639 Insurance Expense

641 Payroll Taxes Expense

643 Utilities Expense

649 Telephone Expense

651 Uncollectible Accounts Expense

657 Bank Fees Expense

658 Delivery Expense

659 Depreciation Expense - Office Equipment

691 Interest Expense

693 Miscellaneous Expense

7-9

A sales journal is a special journal used to record sales of merchandise on credit.

Sales on account only!

The Sales Journal

Four credit sales made on January 3, 8, 11, and 15 require four separate entries in the general journal:

Four debits to Accounts Receivable Four credits to Sales Tax Payable Four credits to Sales Four descriptions

General Journal and General Ledger

7-11

56

700

756111

231

401

Accounts Receivable

Sales Tax Payable

Sales

Sold merchandise on credit to

Barbara Coe, Sales Slip 1103

11

24

300

324111

231

401

Accounts Receivable

Sales Tax Payable

Sales

Sold merchandise on credit to

Amalia Rodriguez, Sales Slip 1104

15

48

600

648111

231

401

Accounts Receivable

Sales Tax Payable

Sales

Sold merchandise on credit to

Cathy Ball, Sales Slip 1102

8

32

400

432111

231

401

Accounts Receivable

Sales Tax Payable

Sales

Sold merchandise on credit to

Roy Anderson, Sales Slip 1101

Jan. 3

CREDIT DEBITPOST. REF.

DESCRIPTIONDate

20--

GENERAL JOURNAL PAGE 2

The four credit sales require twelve postings to the general ledger: Four postings to Accounts Receivable Four postings to Sales Tax Payable Four postings to Sales

General Journal and General Ledger

YIKES!

A special journal intended only for credit sales provides a more efficient method of recording these transactions.

Recording Transactions in a Sales Journal

In a sales journal, only one line is needed to record all information for each transaction. This helps avoid repetition.

7-14

Sales Slip

The Style Shop

Roy Anderson

8913 South Hampton Road

Dallas, TX 75232

400

32

400

Total 432

S Harris

7-15

The Style Shop2007 Trendsetter Lane

Dallas, TX 75268

Roy Anderson

8913 South Hampton Road

Dallas, TX 75232

400

Sales Tax 32

400

Total 432

S Harris

SALES JOURNAL PAGE 1

SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES NO. REF. DEBIT CREDIT CREDIT20--Jan. 3 1101 Roy Anderson 432 32 400

7-16

SALES JOURNAL PAGE 1

SALES ACCOUNTS SALES TAXDATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES NO. REF. DEBIT CREDIT CREDIT20-- Jan. 3 1101 Roy Anderson 214 14 200 8 1102 Cathy Ball 535 35 500 11 1103 Barbara Coe 642 42 600 15 1104 Amalia Rodriguez 428 28 400 18 1105 Fred Wu 856 56 800 21 1106 Linda Carter 321 21 300

28 1107 Kim Ramirez 107 7 100 29 1108 Mesia Davis 1,070 70 1,000 31 1109 Alma Sanchez 963 63 900 31 1110 Roy Anderson 267 17 250 31 Totals 5,886 436 5,450

With a sales journal it is not necessary to post each credit sale individually to general ledger accounts.

Instead, summary postings are made at the end of the month after the amount columns of the sales journal are totaled.

Posting from a Sales Journal

Before any posting takes place, the equality of the debits and credits recorded in the sales journal is proved by comparing the column totals.

DR=CR

7-19

SALES JOURNAL PAGE 1

SALES ACCOUNTS SALES TAXDATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES NO. REF. DEBIT CREDIT CREDIT20-- Jan. 3 1101 Roy Anderson 432 32 400 8 1102 Cathy Ball 648 48 648 11 1103 Barbara Coe 756 56 700 15 1104 Amalia Rodriguez 324 24 300 18 1105 Fred Wu 810 60 750 21 1106 Linda Carter 486 36 450 28 1107 Kim Ramirez 108 8 100 29 1108 Mesia Davis 1080 80 1000 31 1109 Alma Sanchez 972 72 900 31 1110 Roy Anderson 270 20 250

31 Totals 5,886 436 5,450 (111) (401)

ACCOUNT Sales ACCOUNT NO. 401

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT

20-- Jan. 31 S1 5,450 5,450

(231)

7-20

Advantages of a Sales JournalAdvantages of a Sales Journal

Saves time, effort, and recording space

Makes journalizing and posting more efficient

Requires only three summary postings to the general ledger at the end of each month

Allows division of work

Improves the audit trail

7-21

An accounts receivable ledger is a subsidiary ledger that contains credit customer accounts.

The Accounts Receivable Ledger

Makes it possible to verify that customers are paying their balances on time and that they are within their credit limits

Provides a convenient way to answer questions from customers regarding their current balances or about a possible billing error

7-22

The Accounts Receivable LedgerThe Accounts Receivable Ledger

NAME Roy Anderson

ADDRESS 8913 South Hampton, Dallas, Texas 75232-6002

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF.

20 --

Jan. 1 Balance 432

The accounts receivable ledger has three money columns.

The BALANCE column is presumed to contain debit amounts.

3 Sales Slip 1101 S1 432 864

Each credit sale recorded in the sales journal is posted to the appropriate customer’s account in the accounts receivable ledger.

Postings to the accounts receivable ledger are usually made daily so that the customer accounts can be kept up to date at all times.

Posting a Credit Sale

7-24

SALES JOURNAL PAGE 1

SALES ACCOUNTS SALES TAXDATE SLIP CUSTOMER’S POST. RECEIVABLE PAYABLE SALES NO. ACCOUNT DEBITED REF. DEBIT CREDIT CREDIT20--

Jan. 3 1101 Roy Anderson 432 32 400

NAME Roy Anderson

ADDRESS 8913 South Hampton, Dallas, Texas 75232-6002

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. 20 --

Jan. 1 Balance 432 3 Sales Slip 1101 S1 432 864

A sale is entered in the accounting records when the goods are sold or the service is provided.

If something is wrong with the goods or service, the firm may

take a sales return, or

give a sales allowance.

7-26

A sales return is a firm’s acceptance of a return of goods from a customer.

Sales Returns and Allowances

A sales allowance is a reduction in the price originally charged to customers for goods or services.

7-27

When a return or allowance is related to a credit sale, the normal practice is to issue a credit memorandum.

Credit Memorandum

A credit memorandum is a note verifying that a customer’s account is being reduced by the amount of a sales return or sales allowance plus any tax that may have been involved.

7-28

Sales Returns and Allowances

Returns and

Allowances+

A debit to the Sales Returns and Allowances account is preferred to making a direct debit to Sales.

The Sales Returns and Allowances account is a contra revenue account.

7-29

Business Transaction Business Transaction On January 23 The Style Shop issued Credit Memorandum 101 for

a sales allowance to Fred Wu for merchandise purchased on account. The merchandise was damaged but still usable.

The Style Shop

NAME: Fred Wu

ADDRESS: 2007 Trendsetter Lane

Dallas, TX 75268

PHONE:

150

150

162

12

7-30

Sales Returns and Allowances

+150

Accounts ReceivableSales Tax Payable

-162

-12

Sales Allowance

- +

+

7-31

How does a sales allowance transaction affect the financial statements?

QUESTION:

Net income is decreased. Assets, liabilities, and equity are decreased.

ANSWER:

Each sales return or allowance must be posted from the journal to the:

General Ledger A/Rand

customer’s account in the subsidiary A/R ledger.

Posting a Sales Return or Allowance

7-33

Date

20--

DESCRIPTION POST. REF.

DEBIT CREDIT

Jan. 25 Sales Returns and Allowances

Sales Tax Payable

Accounts Rec./Linda Carter

Accepted a return of defective

merchandise,

Credit Memorandum 102;

original sale made on Sales

Slip 1106 of January 21.

451

231

111/

450

36

486

NAME Linda Carter

ADDRESS 1819 Belt Line Road, Dallas, TX 75267-6318

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. 20 -- Jan. 1 Balance 54 21 Sales Slip 1106 S1 486 540 25 CM 102 J1 486 54

111 indicates that the amount was posted to the Accounts Receivable account in the general ledger. The check mark indicates that the amount was posted to the customer’s account.

Posting from the General Journal

7-34

Net sales is the difference between the balance in the Sales account and the

balance in the Sales Returns and Allowances

account and the Sales Discounts account.

Reporting Net Sales

7-35

Sales

Less Sales Returns and Allowances

Net Sales

The Style Shop calculation for net sales

Month Ended January 31, 20--

$25,700

<600>

$25,100

Note: there are no sales discounts

in this problem

The use of an accounts receivable ledger does not eliminate the need for the Accounts Receivable account in the general ledger.

However, the general ledger balance for A/R isnow considered a control account because it is the summary of all the subsidiary A/R accounts.

Schedule of Accounts Receivable

7-37

At the end of each month, after all the postings have been made, the balances in the accounts receivable ledger must be proved against the balance of the Accounts Receivable general ledger account.

TOTAL OF INDIVIDUAL CUSTOMER BALANCES

ACCOUNTS RECEIVABLE BALANCE=

The names of all customers with account balances are listed with the amount of their unpaid balances.

Schedule of Accounts Receivable

A schedule of accounts receivable is a listing of all balances of the accounts in the accounts receivable subsidiary ledger.

7-39

The Style Shop

Schedule of Accounts Receivable

January 31, 20--

Roy Anderson

Cathy Ball

Linda Carter

Barbara Coe

Mesia Davis

Kim Ramirez

Amalia Rodriguez

Alma Sanchez

Fred Wu

Total

702

648

54

1296

1021

216

972

972

464

6345

ACCOUNT Accounts Receivable Account No. 111

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20 -- Jan. 1 Balance 3240 23 J1 162 3078 25 J1 486 2592 31 S1 5886 8478 31 CR1 2133 6345

A comparison of the total of the schedule of accounts receivable and the balance of the Accounts Receivable account shows that the two figures are the same.

7-40

A wholesale business is a manufacturer or distributor of goods that sells to retail businesses or large consumers.

Credit Sales for a Wholesale Business

The basic procedures used by wholesalers to handle sales and accounts receivable are the same as those used by retailers except no sales tax and many wholesalers offer cash and trade discounts

7-41

A trade discount is a reduction from the list price.

Net Price

The list price is the established retail price.

The net price is the list price less all trade discounts.

7-42

List Price

Trade Discounts

Net Price

–

=

Formula for Net Price

7-43

The same goods may be offered to different customers at different trade discounts.

A single trade discount A series of trade discounts

Trade discounts can be offered as

7-44

Suppose the list price of goods is $1,500 and the trade discount is 40 percent.

List Price

$ 600

$1,500

x 40%List price x trade discount

Single Trade Discount

Discount

7-45

List price

$ 900

$1,500

< 600> trade discount

Single Trade Discount

Suppose the list price of goods is $1,500 and the trade discount is 40 percent.

Net Price

7-46

Suppose the list price is $1,500 and the trade discount is quoted as a series of 25 and 15 percent.

$1,500

<375>

first discount $1,500 x 25%=$375

Series of Trade Discounts

$1,125

<168.75>second discount $1,125 x 15%=$168.75

$956.25Net price

7-47

Special journals such as the sales journal can vary in format from company to company.

Using a Sales Journal for a Wholesale Business

No sales tax for a Wholesale Business

7-48

Sales taxes apply only to retail transactions. A wholesale business does not need to account for sales taxes.

The sales journal has a single amount column.

SALES JOURNAL PAGE 1

ACCOUNTS DATE INVOICE CUSTOMER’S POST. RECEIVABLE DR. NO. ACCOUNT DEBITED REF. SALES CR. 20-- Jan. 3 7099 Gabbert’s Hardware Company 18,600

31 71001 Neal’s Department Store 4,200 31 Total 40,875

(111/401)

7-49

SALES JOURNAL PAGE 1

ACCOUNTS DATE INVOICE CUSTOMER’S POST. RECEIVABLE DR. NO. ACCOUNT DEBITED REF. SALES CR. 20-- Jan. 3 7099 Gabbert’s Hardware Company 18,600 31 71001 Neal’s Department Store 4,200 31 Total 40,875

(111/401)

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- Jan. 1 Balance 46,700 31 S1 40,875 87,575

ACCOUNT Accounts Receivable ACCOUNT NO. 111

DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT20-- Jan. 31 S1 40,875 40,875

ACCOUNT Sales ACCOUNT NO. 401

Posting from a Single-Column Journal

7-50

An invoice is a customer billing for merchandise bought on credit.

Invoice

7-51

Sales on Credit

Each business must develop credit policies that achieve maximum sales with minimum losses:

A credit policy that is too tight results in a low level of losses at the expense of increases in sales volume.

A credit policy that is too lenient may result in increased sales volume accompanied by a high level of losses.

7-52

A Cost of Doing Business

Even though the credit investigation is thorough, some accounts receivable become uncollectible.

Unexpected business developments, errors of judgment, incorrect financial data, and many other causes may lead to defaults in payments by customers.

7-53

Different Types of Credit Sales

Open-account credit

Most commonly offered by small businesses granted on the basis of personal knowledge of the customer

Business credit cards

department store chains and gasoline companies, provide their own credit cards Cards issued by credit card companies

7-54

Bank Credit Cards

Retailers can provide credit while minimizing or avoiding the risk of losses from uncollectible accounts by accepting bank credit cards.

The most widely accepted bank credit cards are MasterCard and Visa.

Bank credit cards are issued to consumers directly by banks.