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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
2
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
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
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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
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
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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
10
• 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 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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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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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
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
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:
32
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:
34
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.
36
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:
37
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:
38
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
39
Purchased $20,000 of merchandise on
account; terms 2/10, n/30.
Purchases Journal
48
• 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
49
• DeBice’s cash payments journal under a perpetual inventory system follows:
• Notice the cash payments journal includes a Merchandise Inventory Credit column:
Sales Journal
50
• 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: