7-1
Chapter
7
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 Shop
Meet
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
7-5
Journal Flow Chart
Does the transaction involve cash?
YES
Was cash RECEIVED?
YES NO Record the transaction in the CASH RECEIPTS (CRs) Journal
Use the CRs and CDs Journals to prepare the monthly Bank Reconcilation
Record the transaction in the CASH DISBURSEMENTS (CDs) Journal NO
Was inventory PURCHASED?
YES NO Record the purchase in the PURCHASES Journal (PJ)
Was it a credit SALE?
YES NO Record the Transaction in the SALES Journal (SJ) Record the Transaction In the GENERAL Journal (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
7-8 ASSETS
101 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.
LIABILITIES
201 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 EQUITY
301 Mary Amos, Capital 302 Mary Amos, Drawing 399 Income Summary
REVENUE
401 Sales
451 Sales Returns and Allowances 491 Interest Income
493 Miscellaneous Income
The Style Shop
Chart of Accounts
COST OF GOODS SOLD
501 Purchases 502 Freight In
503 Purchases Returns and Allowances 504 Purchases Discounts
EXPENSES
611 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
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
7-11 56 700 756 111 231 401 Accounts Receivable
Sales Tax Payable Sales
Sold merchandise on credit to Barbara Coe, Sales Slip 1103 11 24 300 324 111 231 401 Accounts Receivable
Sales Tax Payable Sales
Sold merchandise on credit to Amalia Rodriguez, Sales Slip 1104 15 48 600 648 111 231 401 Accounts Receivable
Sales Tax Payable Sales
Sold merchandise on credit to Cathy Ball, Sales Slip 1102
8 32 400 432 111 231 401 Accounts Receivable
Sales Tax Payable Sales
Sold merchandise on credit to Roy Anderson, Sales Slip 1101 Jan. 3
CREDIT DEBIT POST. REF. DESCRIPTION Date
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
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 Shop
2007 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 1SALES ACCOUNTS SALES TAX
DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES
NO. REF. DEBIT CREDIT CREDIT
7-16
SALES JOURNAL
PAGE 1SALES ACCOUNTS SALES TAX
DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES
NO. REF. DEBIT CREDIT CREDIT
Jan. 3 1101 Roy AndersonΠ
214 14 200
8 1102 Cathy Ball
Π
535 35 50011 1103 Barbara Coe
Π
642 42 600
15 1104 Amalia Rodriguez
Π
428 28 400
18 1105 Fred Wu
Π
856 56 80021 1106 Linda Carter
Π
321 21 30028 1107 Kim Ramirez
Π
107 7 10029 1108 Mesia Davis
Π
1,070 70 1,000 31 1109 Alma SanchezΠ
963 63 90031 1110 Roy Anderson
Π
267 17 250 31 Totals 5,886 436 5,450With 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.
Before any posting takes place, the equality of the
debits and credits recorded in the sales journal is
proved by comparing the column totals.
7-19
SALES JOURNAL
PAGE 1SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES NO. REF. DEBIT CREDIT CREDIT 20--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
Jan. 31 S1 5,450 5,450
7-20
Advantages of a Sales Journal
Advantages 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
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 Ledger
The 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
Π
432
The accounts receivable ledger has three money columns.
The BALANCE column is
presumed
to contain debit amounts.
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.
7-24
SALES JOURNAL
PAGE 1SALES ACCOUNTS SALES TAX
DATE SLIP CUSTOMER’S
POST. RECEIVABLE PAYABLE SALES
NO. ACCOUNT DEBITED REF. DEBIT CREDIT CREDIT
Jan. 3 1101 Roy Anderson
Π
432 32 400NAME Roy Anderson
ADDRESS
8913 South Hampton, Dallas, Texas 75232-6002
DATE DESCRIPTION
POST. DEBIT CREDIT BALANCE
REF.
20
--Jan. 1 Balance
Π
432
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
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
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
Receivable
Sales 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.
Each sales return or allowance must be
posted from the journal to the:
General Ledger A/R
and
customer’s account in the
subsidiary A/R ledger.
Posting a Sales Return or
Allowance
7-33 486 450 36 451 231 111/Π
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. Jan. 25
CREDIT DEBIT POST. REF. DESCRIPTION Date
20--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.
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.
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 is
now considered a
control account
because it is the
summary of all the subsidiary A/R accounts.
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.
7-39 702 648 54 1296 1021 216 972 972 464 6345 Roy Anderson Cathy Ball Linda Carter Barbara Coe Mesia Davis Kim Ramirez Amalia Rodriguez Alma Sanchez Fred Wu Total The Style Shop Schedule of Accounts Receivable January 31,
20--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
–
=
7-43
The same goods may be offered to different
customers at different trade discounts.
A single trade discount
A series of trade discounts
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
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.
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
$956.25
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 1ACCOUNTS
DATE INVOICE CUSTOMER’S POST. RECEIVABLE
DR
.
NO. ACCOUNT DEBITED REF. SALES
CR
.
Jan. 3 7099
Gabbert’s Hardware Company
18,600
31 71001 Neal’s Department Store
4,200
31 Total
40,875
7-49
SALES JOURNAL
PAGE 1ACCOUNTS
DATE INVOICE CUSTOMER’S POST. RECEIVABLE DR.
NO. ACCOUNT DEBITED REF. SALES CR.
20--Jan. 3 7099 Gabbert’s Hardware Company Π 18,600
31 71001 Neal’s Department Store Π 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 CREDIT 20--
Jan. 31 S1 40,875 40,875 ACCOUNT Sales ACCOUNT NO. 401
7-50
An invoice is a customer billing for
merchandise bought on credit.
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
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