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(1)

7-1

Chapter

7

(2)

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.

(3)

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

(4)

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

(5)

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)

(6)

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)

7-7

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

(8)

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

(9)

7-9

A

sales journal

is a special journal

used to record sales of merchandise

on credit.

Sales on account only!

The Sales Journal

(10)

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

(11)

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

(12)

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

(13)

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.

(14)

7-14

Sales Slip

The Style Shop

Roy Anderson

8913 South Hampton Road Dallas, TX 75232

400

32 400

Total 432 S Harris

(15)

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 1

SALES ACCOUNTS SALES TAX

DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES

NO. REF. DEBIT CREDIT CREDIT

(16)

7-16

SALES JOURNAL

PAGE 1

SALES ACCOUNTS SALES TAX

DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES

NO. REF. DEBIT CREDIT CREDIT

Jan. 3 1101 Roy Anderson

Π

214 14 200

8 1102 Cathy Ball

Π

535 35 500

11 1103 Barbara Coe

Π

642 42 600

15 1104 Amalia Rodriguez

Π

428 28 400

18 1105 Fred Wu

Π

856 56 800

21 1106 Linda Carter

Π

321 21 300

28 1107 Kim Ramirez

Π

107 7 100

29 1108 Mesia Davis

Π

1,070 70 1,000 31 1109 Alma Sanchez

Π

963 63 900

31 1110 Roy Anderson

Π

267 17 250 31 Totals 5,886 436 5,450

(17)

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.

(18)

Before any posting takes place, the equality of the

debits and credits recorded in the sales journal is

proved by comparing the column totals.

(19)

7-19

SALES JOURNAL

PAGE 1

SALES 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

(20)

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

(21)

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

(22)

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.

(23)

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.

(24)

7-24

SALES JOURNAL

PAGE 1

SALES 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 32 400

NAME Roy Anderson

ADDRESS

8913 South Hampton, Dallas, Texas 75232-6002

DATE DESCRIPTION

POST. DEBIT CREDIT BALANCE

REF.

20

--Jan. 1 Balance

Π

432

(25)

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

.

(26)

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

(27)

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.

(28)

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

(29)

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

(30)

7-30

Sales Returns and

Allowances

+

150

Accounts

Receivable

Sales Tax Payable

-162

-12

Sales Allowance

(31)

7-31

How does a sales allowance

transaction affect the financial

statements?

QUESTION:

Net income is decreased. Assets, liabilities,

and equity are decreased.

(32)

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

(33)

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.

(34)

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.

(35)

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

(36)

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.

(37)

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

(38)

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.

(39)

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.

(40)

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

(41)

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.

(42)

7-42

List Price

Trade Discounts

Net Price

=

(43)

7-43

The same goods may be offered to different

customers at different trade discounts.

A single trade discount

A series of trade discounts

(44)

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

(45)

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.

(46)

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

(47)

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

(48)

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

.

Jan. 3 7099

Gabbert’s Hardware Company

18,600

31 71001 Neal’s Department Store

4,200

31 Total

40,875

(49)

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 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

(50)

7-50

An invoice is a customer billing for

merchandise bought on credit.

(51)

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

(52)

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.

(53)

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

(54)

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

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