Chapter 7 Skyline College

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. There are three types of business operations: service, merchandising, and manufacturing. A manufacturing business is a business that sells goods that it has produced.

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 In this chapter, we will be working with a merchandising business called the Style Shop.

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 new special journal will be introduced in this chapter—the sales journal. A subsidiary ledger is a ledger dedicated to accounts of a single type.

Journal Flow Chart Does the transaction involve cash? YES NO Was cash RECEIVED? Was inventory PURCHASED? YES NO YES NO Record the transaction in the CASH RECEIPTS (CRs) Journal Record the transaction in the CASH DISBURSEMENTS (CDs) Journal Record the purchase in the PURCHASES Journal (PJ) Was it a credit SALE? YES NO Use the CRs and CDs Journals to prepare the monthly Bank Reconcilation Record the Transaction in the SALES Journal (SJ) Record the Transaction In the GENERAL Journal (GJ)

Journals Used by Merchandising Businesses Type of Journal Purpose Sales To record sales of merchandise on credit Purchases To record purchases of merchandise on credit Cash receipts To record cash received from all sources There are several special journals which are very common in business including: Sales, Purchases, Cash receipts, Cash payments and of course, the General Journal. Cash payments To record all disbursements of cash General To record all transactions that are not recorded in another special journal and all adjusting and closing entries

Ledgers Used by Merchandising Businesses Type of Ledger Content General Assets, liabilities, owner’s equity, revenue, and expense accounts Accounts receivable Accounts for credit customers We have already used the general ledger but the supporting Accounts Receivable and Accounts Payable subsidiary ledgers are also very common. Accounts payable Accounts for creditors

The Style Shop Chart of Accounts 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. REVENUE 401 Sales 451 Sales Returns and Allowances 491 Interest Income 493 Miscellaneous Income 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 Advertising Expense 617 Cash Short or Over 626 Depreciation Expense - Store Equipment Rent Expense 637 Salaries Expense - Office Insurance Expense Payroll Taxes Expense 643 Utilities Expense 649 Telephone Expense Uncollectible Accounts Expense 657 Bank Fees Expense 658 Delivery Expense 659 Depreciation Expense - Office Equipment 691 Interest Expense 693 Miscellaneous Expense 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 Here is the chart of accounts for The Style Shop, our merchandising business. OWNER’S EQUITY 301 Mary Amos, Capital 302 Mary Amos, Drawing 399 Income Summary

Sales on account only! The Sales Journal A sales journal is a special journal used to record sales of merchandise on credit. Sales on account only! The Sales Journal is a special journal used to record only sales of merchandise on credit.

General Journal and General Ledger 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 Let’s consider the four sales made by the business during January.

GENERAL JOURNAL 8 PAGE 2 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 Amalia Rodriguez, Sales Slip 1104 15 48 600 648 Cathy Ball, Sales Slip 1102 8 32 400 432 Roy Anderson, Sales Slip 1101 Jan. 3 CREDIT DEBIT POST. REF. DESCRIPTION Date 20-- GENERAL JOURNAL PAGE 2 The journal entries are very repetitious.

General Journal and General Ledger 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 YIKES! After journalizing, we still need to post the transactions.

Recording Transactions in a Sales Journal A special journal intended only for credit sales provides a more efficient method of recording these transactions. A sales journal makes the time involved in journalizing much shorter. In a sales journal, only one line is needed to record all information for each transaction. This helps avoid repetition.

Sales Slip The Style Shop 400 400 S Harris 32 Total 432 Roy Anderson 8913 South Hampton Road Dallas, TX 75232 The sales slip tells us who the customer is and the sales amount, the sales tax charged and the total amount that the customer must pay.

The Style Shop SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX 2007 Trendsetter Lane Dallas, TX 75268 400 400 S Harris Sales Tax 32 Total 432 Roy Anderson 8913 South Hampton Road Dallas, TX 75232 First we enter the date, then the sales slip number, then the customer’s name. Next, enter the Sales amount before taxes in the Sales column. Then enter the sales tax owed in the Sales Tax Payable column and finally, enter the total of the sales slip in the Accounts Receivable column. Even in a special journal, the total of the debits must equal the total of the credits. 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

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  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 A sales journal has specialized columns for accounts that are used most often.

Posting from a Sales Journal With a sales journal it is not necessary to post each credit sale individually to general ledger accounts. Summary postings are made at the end of the month. 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. DR=CR Make sure that your total debits equal your total credits before any posting to the general ledger takes place.

SALES JOURNAL PAGE 1 ACCOUNT Sales ACCOUNT NO. 401 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) (231) (401) Similar posting is made to the Sales account in the general ledger. ACCOUNT Sales ACCOUNT NO. 401 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- Jan. 31 S1 5,450 5,450

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 Here are just a few advantages. Allows division of work Improves the audit trail

The Accounts Receivable Ledger An accounts receivable ledger is a subsidiary ledger that contains credit customer accounts. 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

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  432 3 Sales Slip 1101 S1 432 864 A subsidiary ledger has three money columns. The accounts receivable ledger has three money columns. The BALANCE column is presumed to contain debit amounts.

Posting a Credit Sale Each credit sale recorded in the sales journal is posted to the appropriate customer’s account in the accounts receivable ledger. Customer accounts must be updated on the day of the sale. Postings to the accounts receivable ledger are usually made daily so that the customer accounts can be kept up to date at all times.

SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER’S POST. RECEIVABLE PAYABLE SALES NO. ACCOUNT DEBITED REF. DEBIT CREDIT CREDIT 20-- 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. the use of a check mark in the Posting Reference Column indicates that a subsidiary ledger was updated. 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. When something is wrong with a sale, a customer may return the goods or be granted a sales allowance.

Sales Returns and Allowances A sales return is a firm’s acceptance of a return of goods from a customer. A sales allowance is a reduction in the price originally charged to customers for goods or services. Sales returns are common in business.

Credit Memorandum When a return or allowance is related to a credit sale, the normal practice is to issue a 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. Credit memos are issued by the firm to customers who return a good or who receive an allowance.

Sales Returns and Allowances A debit to the Sales Returns and Allowances account is preferred to making a direct debit to Sales. Sales Returns and Allowances Returns and Allowances + We debit the Sales Returns and Allowances account. The Sales Returns and Allowances account is a contra revenue account.

Business Transaction The Style Shop 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 150 NAME: Fred Wu ADDRESS: 2007 Trendsetter Lane Dallas, TX 75268 PHONE: Here is an example of a sales allowance which is granted to Fred Wu. 150 12 162

Sales Returns and Allowances Sales Allowance Sales Returns and Allowances Accounts Receivable Sales Tax Payable + 150 - - 12 - 162 + + Here is how it looks in the T accounts.

How does a sales allowance transaction affect the financial statements? QUESTION: Net income is decreased. Assets, liabilities, and equity are decreased. ANSWER: A sales allowance will reduce net sales on the income statement and will reduce Accounts Receivable and Sales Tax Payable on the balance sheet.

Posting a Sales Return or Allowance 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. In addition, any subsidiary ledger accounts must be updated daily.

Posting from the General Journal 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 36 486 111 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. NAME Linda Carter ADDRESS 1819 Belt Line Road, Dallas, TX 75267-6318 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. Please note the double posting reference if the return had been journalized in a general journal instead. 20 -- Jan. 1 Balance  54 21 Sales Slip 1106 S1 486 540 25 CM 102 J1 486 54

Sales Returns and Allowances account and the Sales Discounts account. Reporting Net Sales 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. Subtract any Sales Returns and Allowances from the Sales account.

Note: there are no sales discounts Less Sales Returns and Allowances Net Sales The Style Shop calculation for net sales Month Ended January 31, 20-- $25,700 <600> $25,100 Notice that net sales is $25,100 for the month of January for The Style Shop. Note: there are no sales discounts in this problem

Schedule of Accounts Receivable 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. The Accounts Receivable account is the control account in the General ledger. Its total is reported on the balance sheet.

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. The schedule of accounts receivable is simply a list of all of your customers and how much they owe. TOTAL OF INDIVIDUAL CUSTOMER BALANCES ACCOUNTS RECEIVABLE BALANCE =

Schedule of Accounts Receivable A schedule of accounts receivable is a listing of all balances of the accounts in the accounts receivable subsidiary ledger. The schedule of accounts receivable is particularly important to a business owner or credit manager in keeping track of how much money someone owes the company and for how long that amount has been outstanding. The names of all customers with account balances are listed with the amount of their unpaid balances.

Schedule of Accounts Receivable 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 216 972 464 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. ACCOUNT Accounts Receivable Account No. 111 DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT Notice that the total in the Schedule of Accounts Receivable equals the total in the General ledger Accounts Receivable account. 20 -- Jan. 1 Balance  3240 23 J1 162 3078 25 J1 486 2592 31 S1 5886 8478 31 CR1 2133 6345

Credit Sales for a Wholesale Business A wholesale business is a manufacturer or distributor of goods that sells to retail businesses or large consumers. 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 A wholesale business is a firm which sells goods to another firm who will then sell it to the final consumer.

Net Price The list price is the established retail price. A trade discount is a reduction from the list price. A trade discount is a reduction from the list price. The net price is the list price less all trade discounts.

Formula for Net Price – = List Price – Trade Discounts = Net Price Here is the formula for figuring Net price.

Trade discounts can be offered as The same goods may be offered to different customers at different trade discounts. Trade discounts can be offered as A single trade discount A series of trade discounts The amount of the trade discount may depend on the size of the order and the costs of selling to the various types of customers.

List price x trade discount Single Trade Discount Suppose the list price of goods is $1,500 and the trade discount is 40 percent. List Price $1,500 x 40% List price x trade discount A single trade discount of 40% provides a discount of $600. $ 600 Discount

Single Trade Discount Suppose the list price of goods is $1,500 and the trade discount is 40 percent. List price $1,500 < 600> trade discount Subtracting the discount of $600 gives a net price of $900 which would be owed by the customer. $ 900 Net Price

Series of Trade Discounts Suppose the list price is $1,500 and the trade discount is quoted as a series of 25 and 15 percent. first discount $1,500 x 25% =$375 $1,500 <375> second discount $1,125 x 15% =$168.75 $1,125 <168.75> If the retailer offers a series discount of first 25% and then 15%, then the first discount of 25% would provide a discount of $375. $956.25 Net price

Using a Sales Journal for a Wholesale Business Special journals such as the sales journal can vary in format from company to company. Special sales journals will vary in appearance from company to company. No sales tax for a Wholesale Business

The sales journal has a single amount column. Sales taxes apply only to retail transactions. A wholesale business does not need to account for sales taxes. 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) Since wholesalers don’t collect sales tax on their sales, they have no need of a Sales Tax Payable column in their sales journal. The sales journal has a single amount column.

Posting from a Single-Column Journal 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 Posting rules would be the same as in the previous sales journal discussed earlier. DATE DESCRIPTION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20-- Jan. 31 S1 40,875 40,875 ACCOUNT Sales ACCOUNT NO. 401

Invoice An invoice is a customer billing for merchandise bought on credit. Invoices may be given to the customer at the time of the sale or mailed to them.

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. The use of credit is considered to be one of the most important factors in the rapid growth of businesses today.

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. Some customers may never pay what is owed.

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 There are four very common types of credit sales.

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. Good examples of Bank credit cards are Visa and MasterCard. The same accounts are affected by a bank card sale as a cash sale. Bank credit cards are issued to consumers directly by banks.