1. Welcome Back
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2. Welcome Back
Time for Any Question
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3. Atef Abuelaish

4. CHAPTER # 06
REVIEW
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5. Chapter 06
Closing Entries and
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6. Closing Entries and Postclosing Trail Balance
Chapter 06
Closing Entries and Postclosing Trail Balance
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7. Closing Entries and the Postclosing Trial Balance
Chapter 6
Closing Entries and the Postclosing Trial Balance
Section 1: Closing Entries
Section Objectives
Chapter 5 introduced and showed how to use the worksheet. It also covered the preparation of adjusting entries and financial statements. Chapter 6 completes the accounting cycle by showing how the books are closed before the next financial period begins. In this first section, we learn how to make closing entries.
6-1 Journalize and post closing entries.
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8. The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Step 5 Prepare financial statements
Step 9 Interpret the financial information
Step Journalize and post adjusting entries
Journalizing and posting closing entries is the seventh step in the accounting cycle. Closing entries are journal entries which are completed at the end of an accounting cycle so that the business can start fresh in the next accounting period. Closing entries are journal entries that transfer the results of operations (net income or net loss) to owner’s equity and reduce the revenue, expense, and drawing account balances to zero.
Step 7 Journalize and post closing entries
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance
The seventh step in the accounting cycle is to journalize and post closing entries
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9. What is the Income Summary account?
QUESTION:
What is the Income Summary account?
The Income Summary account is a special owner’s equity account that is used only in the closing process to summarize the results of operations.
ANSWER:
The Income Summary account is only used during the closing process.
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10. Income Summary Account
Classified as a temporary owner’s equity account.
Does not have a normal balance.
Has a zero balance after the closing process and remains with a zero balance until the closing procedure for the next period.
The Income Summary account is classified as a temporary owner’s equity account which will have a zero balance at the end of the accounting period.
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11. Journalize and post closing entries.
There are four steps in the closing process:
1. Transfer the revenue account balances to the Income Summary account.
2. Transfer the expense account balances to the
Income Summary account.
3. Transfer the Income Summary account balance to the owner’s capital account.
Let’s further discuss the closing process. Objective one is to journalize and post closing entries. There are four steps in the closing process: close the revenue accounts, close the expense accounts, close the income summary account, and close the drawing account.
4. Transfer the drawing account balance to the owner’s capital account.
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12. Wells’ Consulting Services
Worksheet
Month Ended December 31, 2016
TRIAL BALANCE
ADJUSTMENTS
ADJ. TRIAL BAL.
INCOME STMT.
BALANCE SHEET
ACCOUNT NAME
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
Cash
111,350
111,350
111,350
Accounts Receivable
5,000
5,000
5,000
Supplies
1,500
(a) 500
1,000
1,000
Prepaid Rent
8,000
(b) 4,000
4,000
4,000
Equipment
11,000
11,000
11,000
Accum. Depr.—Equip.
(c)
183
183
Accounts Payable
3,500
3,500
3,500
Carolyn Wells, Cap.
100,000
100,000
100,000
Carolyn Wells, Draw.
5,000
5,000
5,000
Fees Income
47,000
47,000
47,000
Salaries Expense
8,000
8,000
8,000
Utilities Expense
The closing process begins by closing out all revenue accounts to zero. By reviewing the worksheet from the previous chapter, we will note that we only have one revenue account, Fees Income. So, we need to close the one revenue account to zero. Currently Fees Income has a $47,000 credit balance on the worksheet. Fees Income is closed to the Income Summary account.
650
650
650
Supplies Expense
(a) 500
500
500
Rent Expense
(b) 4,000
4,000
4,000
Depr. Exp.—Equip.
150,500
150,500
(c)
183
183
103,683
Totals
4,683
4,683
150,683
150,683
13,333
47,000
137,350
Net Income
Fees Income has a credit
balance of $47,000
33,667
33,667
47,000
47,000
137,350
137,350
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13. Step 1: Close Revenue Fees Income Income Summary Balance 47,000
Closing 47,000
Closing 47,000
To record a decrease in a revenue account, debit it and then make a corresponding entry into the Income Summary account. The revenue account, Fees Income, is decreased by $47,000 to zero. The $47,000 is transferred to the temporary owner’s equity account, Income Summary.
Fees Income would be debited for $47,000 and Income Summary would be credited for $47,000.
Here is our first closing entry represented in T accounts. Please note that after this closing entry, Fees Income has a zero balance. That was the goal of our closing entry to get the account ready for next year with a starting balance of zero.
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14. Step 1: Close Revenue GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Closing Entries
Dec Fees Income ,000.00
Income Summary ,000.00
Here is the first closing general journal entry. Notice that the notation “closing entry” was written above the first closing journal entry.
The words “Closing Entries” are written in the Description column of the general journal
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15. Step 2: Close Expenses
The Income Statement section of the worksheet for Wells’ Consulting Services lists five expense accounts.
Since expense accounts have debit balances, enter a credit in each account to reduce its balance to zero.
This closing entry transfers total expenses to the Income Summary account.
Step 2 is to close all of the expense accounts. Since expense accounts have a debit balance, we need to credit them to close their balances to zero.
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16. Step 2: Close Expenses
The five expense account balances are reduced to zero.
The total, $13,333 of expenses are transferred to the temporary owner’s equity account, Income Summary.
When closing the expense accounts, we will transfer their balances to the Income Summary account.
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17. Income Summary Salaries Expense Bal 47,000 Balance 8,000
Closing ,333
Closing 8,000
Utilities Expense
Supplies Expense
Balance
Balance
Closing 650
Closing 500
Since the expense accounts have a debit balance, we need to credit them to close them to zero. A corresponding debit will be made to the Income Summary account. The Income Summary account will be debited for the total of all the credits made to the expense accounts. Each expense account will be credited to bring their balance down to zero.
Here is what the T accounts look like. Each expense account was closed to zero and a corresponding debit was made to the Income Summary account for $13,333.
Rent Expense
Depr. Expense – Equip.
Balance 4,000
Balance
Closing 4,000
Closing 183
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18. Step 2: Close Expenses GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Closing Entries
Dec Income Summary ,333.00
Salaries Expense ,000.00
Utilities Expense
Supplies Expense
Rent Expense ,000.00
Depreciation Exp.-Equip
Here is the second closing journal entry. Notice that Income Summary is listed first because it is the only debited account.
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19. The Income Summary account reflects all entries in the Income Statement section of the worksheet.
Cr.
Balance 33,667
Closing 47,000
Dr.
Closing 13,333
After making the first two closing entries, Income Summary has a balance of $33,667. This is the difference between the revenues and the expenses, or net income. This amount will be transferred to the capital account of the owner.
Net Income
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20. Step 3: Close Net Income to Capital
The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Carolyn Wells, Capital.
The Income Summary account is reduced to zero.
The net income amount, $33,667, is transferred to the owner’s capital account. Carolyn Wells, Capital is increased by $33,667.
Our third closing entry transfers net income to Carolyn Wells, Capital.
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21. Step 3: Close Net Income to Capital
Income Summary
Carolyn Wells, Capital
Balance 33,667
Balance 100,000
Closing 33,667
Closing 33,667
Income Summary has a credit balance of $33,667 at this point, so to close it we would debit it for this amount and make a corresponding credit to the Owner’s capital account for the same amount. Here is an illustration of what the third closing entry would look like in the T accounts.
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22. Step 3: Close Net Income to Capital
GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Closing Entries
Dec. 31 Income Summary ,667.00
Carolyn Wells, Capital ,667.00
Here is the third closing journal entry.
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23. Step 4: Close Drawing to Capital
Withdrawals appear in the statement of owner’s equity as a deduction from capital.
The drawing account is closed directly to the capital account.
The drawing account balance is reduced to zero.
The balance of the drawing account, $5,000, is transferred to the owner’s capital account.
Our final step is to close the owner’s drawing account.
Step 4—The owner’s drawing account has a debit balance and is closed directly to the owner’s capital account. In this step, we are reducing the drawing account balance of $5,000 to zero.
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24. Step 4: Close Drawing to Capital
Carolyn Wells, Capital
Carolyn Wells, Drawing
Balance 133,667
Balance 5,000
Closing 5,000
Closing 5,000
We need to debit Carolyn Wells, Capital for $5,000 and credit Carolyn Wells, Drawing for $5,000 to close it to zero.
After making the credit to the Drawing account, its balance is zero and the capital account has been reduced by the withdrawals made during the period. This was another goal of the closing process; to update the owner’s capital account.
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25. Step 4: Close Drawing to Capital
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Closing Entries
Dec. 31 Carolyn Wells, Capital ,000.00
Carolyn Wells, Drawing ,000.00
The last closing journal entry is shown here.
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26. The new balance of the Carolyn Wells, Capital account agrees with the amount listed on the balance sheet.
Carolyn Wells, Drawing
Carolyn Wells, Capital
Dr.
Balance 5,000
Balance
Cr.
Balance 100,000
Net Inc ,667
Balance 128,667
Closing 5,000
Cr.
Dr.
Drawing 5,000
Carolyn Wells, Capital will show a balance of $128,667 on the Balance Sheet.
Carolyn Wells, Capital
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27. Summary of Closing Entries
STEPS
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF DEBIT CREDIT
Closing Entries
1. Close Revenue Account
Dec Fees Income ,000.00
Income Summary ,000.00
2. Close Expense Accounts
Income Summary ,333.00
Salaries Expense ,000.00
Utilities Expense
Supplies Expense
Rent Expense ,000.00
Depr. Expense-Equip
Here are all four of the closing journal entries:
Step 1—close the revenue accounts
Step 2—close the expense accounts
Step 3—close the Income Summary account
Step 4—close the Drawing account
3. Close
Income Summary
Income Summary ,667.00
Carolyn Wells, Capital ,667.00
4. Close
Drawing Account
Carolyn Wells, Capital ,000.00
Carolyn Wells, Draw ,000.00
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28. Posting the Closing Entries
All journal entries are posted to the general ledger accounts.
“Closing” is entered in the Description column of the ledger accounts.
The ending balances of the drawing, revenue, and expense accounts are zero.
Now all of the closing journal entries need to be posted to the general ledger.
When posting the closing entries, make sure you write “closing” in the description column of the general ledger.
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29. GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT STEPS
Closing Entries
Dec Fees Income ,000.00
Income Summary ,000.00
STEPS
1. CLOSE
REVENUE
ACCOUNT Fees Income ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2016
Dec J , ,000.00
Dec J , ,000.00
Dec Closing J , – 0 –
Here is the Fees Income account in the general ledger. Notice that after posting the closing journal entry of a $47,000 debit, it now has an end of period balance of zero.
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30. GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT STEPS
Closing Entries
1. CLOSE
REVENUE
Dec Fees Income ,000.00
Income Summary ,000.00
ACCOUNT Income Summary ACCOUNT NO
POST BALANCE
DATE DESCRIPTION REF DEBIT CREDIT DEBIT CREDIT
2016
Dec Closing J , ,000.00
After posting to the Fees Income account in the general ledger, we post to the Income Summary. The remaining three closing entries are posted in a similar fashion.
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31. Closing Entries and the Postclosing Trial Balance
Chapter 6
Closing Entries and the Postclosing Trial Balance
Section 2: Using Accounting Information
6-2. Prepare a postclosing trial balance.
6-3. Interpret financial statements.
6-4. Review the steps in the accounting cycle.
In the second objective of this chapter, we will learn how to prepare a postclosing trial balance for a business.
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32. The Accounting Cycle Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Step 5 Prepare financial statements
We need to prepare another trial balance called the post-closing trial balance.
Step 8 is to prepare a postclosing trial balance and Step 9 is to interpret the financial information.
Step 9 Interpret the financial information
Step 9 Interpret the financial information
Step Journalize and post adjusting entries
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance
Step 8 Prepare a postclosing trial balance
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33. Prepare a postclosing Trial Balance.
QUESTION:
What is the postclosing trial balance?
A postclosing trial balance is a report that is prepared to prove the equality of total debits and credits after the closing process is completed. It verifies that revenue, expense, and drawing accounts have zero balances.
ANSWER:
The postclosing trial balance is prepared after the closing process. It contains only the permanent accounts which were not closed at the end of the period. It proves that debits still equal credits and that all temporary accounts were closed to zero. When we interpret financial information, we are evaluating the financial information presented, and communicating this information to various stakeholders, both inside and outside of the business.
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34. ACCOUNT NAME DEBIT CREDIT
Wells’ Consulting Services
Postclosing Trial Balance
December 31, 2016
ACCOUNT NAME DEBIT CREDIT
Cash ,350.00
Accounts Receivable ,000.00
Supplies ,000.00
Prepaid Rent ,000.00
Equipment ,000.00
Accumulated Depreciation–Equipment
Accounts Payable ,500.00
Carolyn Wells, Capital ,667.00
Totals , ,350.00
Only permanent accounts appear on the postclosing trial balance. This would include all asset and liability accounts, as well as capital. Notice that debits equal credits on the post closing trial balance.
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35. Finding and Correcting Errors
If the postclosing trial balance does not balance, the accounting records contain errors.
Use the audit trail to trace data through the accounting records.
We can use the audit trail to help us locate errors. Oftentimes this requires that we backtrack trough the process to find where we may have added or subtracted incorrectly, posted incorrectly, or journalized incorrectly.
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36. Interpret financial statements. Objective 6-3
What do users do with the finished financial statements?
In objective three we learned how users value the information provided in financial statements. To interpret means to understand and explain the meaning and importance of something. Financial statements help users make all kinds of decisions. Financial statements provide important answers to questions such as:
What is the cash balance?
How much do customers owe the business?
How much does the business owe suppliers?
What is the profit or loss?
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37. Wells’ Consulting Services Partial Balance Sheet December 31, 2016
Assets
Cash $ 111,350.00
Accounts Receivable ,000.00
Supplies ,000.00
Prepaid Rent ,000.00
Equipment $ 11,000.00
Less Accumulated Depreciation ,817.00
Total Assets $ 132,167.00
From looking at a balance sheet you can see that the Cash account has a balance of $111,350. Let’s look at Accounts Receivable on the balance sheet. You can see that our customers owe us $5,000.
What is the cash balance?
How much do the customers owe the business?
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38. Wells’ Consulting Services Balance Sheet December 31, 2016
Assets
Cash $ 111,350.00
Accounts Receivable ,000.00
Supplies ,000.00
Prepaid Rent ,000.00
Equipment $ 11,000.00
Less Accumulated Depreciation ,817.00
Total Assets $ 132,167.00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable $ 3,500.00
Owner’s Equity
Carolyn Wells, Capital ,667.00
Total Liabilities and Owner’s Equity $132,167.00
You can also see what the company owes to its vendors. The business owes $3,500 to creditors.
How much does the business owe its suppliers?
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39. Wells’ Consulting Services Income Statement
Month Ended December 31, 2016
Revenue
Fees Income ,000.00
Expenses
Salaries Expense ,000.00
Utilities Expense
Supplies Expense
Rent Expense ,000.00
Depr. Expense--Equipment
Total Expenses ,333.00
Net Income ,667.00
Did the company generate a profit or loss? You can tell by reviewing the income statement that the business had net income of $33,667.
What is the profit?
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40. The Accounting Cycle Review the steps in the accounting cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Prepare financial statements
Income Statement
Statement of Owner’s Equity
Balance Sheet
Step 5 Prepare financial statements
Step 5 Prepare financial statements
Objective 4 is the last objective in this chapter.
In step 5, we use the worksheet to prepare our financial statements.
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41. The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Transfer net income or net loss to owner’s equity.
Reduce the balances of the
temporary accounts to zero.
Step 5 Prepare financial statements
In step 6, we journalize and post adjusting entries. In step 7, we journalize and post our end of period closing entries.
Step Journalize and post adjusting entries
Step 7 Journalize and post closing entries
Step 7 Journalize and post closing entries
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42. The Accounting Cycle Step 1 Analyze transactions
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 4 Prepare a worksheet
Step 5 Prepare financial statements
Step Journalize and post adjusting entries
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance
Step 9 Interpret the financial information
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Step 5 Prepare financial statements
In Step 8, we prepare a postclosing trial balance. In step 9, we interpret the financial information. These nine steps comprise an entire accounting cycle. Take a look at each one and see if you can remember what was involved in each step of the cycle.
Step 9 Interpret the financial information
Step Journalize and post adjusting entries
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance
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43. Flow of Data Through a Simple Accounting System
Source
Documents
Source
Documents
General
journal
General
ledger
Worksheet
Financial
statements
After studying the accounting cycle of Wells’ Consulting Services, you should have an understanding of how data flows through a simple accounting system for a small business. Review the flow and make certain that you are comfortable with the documents and reports.
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44. Chapter 07
Accounting for Sales,
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45. Accounting for Sales, Accounts Receivable, and
Chapter 07
Accounting for Sales, Accounts Receivable, and
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46. Accounting for Sales, Accounts Receivable, and Cash Receipts
Chapter 07
Accounting for Sales, Accounts Receivable, and Cash Receipts
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47. Accounting for Sales, Accounts Receivable, and Cash Receipts
Chapter 7
Accounting for Sales, Accounts Receivable, and Cash Receipts
Section 1: Understanding Merchandising Companies
Section Objectives
Chapter 6 explained the closing process and post-closing trial balance. Chapter 7 explains the accounting processes for retail and wholesale sales. In this first of the two sections, we are introduced to recording transactions for a retailer in a general journal.
7-1 Record sales on account, credit card sales, sales returns, and cash receipt transactions in a general journal
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48. Meet Maxx-Out Sporting Goods
Maxx-Out Sporting Goods is a merchandising business that sells the latest sporting goods and sportswear for men, women, and children.
It is a retail business.
Max Ferraro is the sole proprietor of the firm.
There are three types of business operations: service, merchandising, and manufacturing. A service business provides a service to its customers. A merchandising business, sells a product to its customers and generates a profit on those sales. A manufacturing business makes a product and sells its product to customers or to retailers who then sell it to customers.
In this chapter, we will be working with a merchandising business called the Maxx-Out Sporting Goods. A retailer is another name for a merchandising business. It sells directly to the customer. The Maxx-Out Sporting Goods will sell goods that it purchases from its suppliers and will keep track of its available-for-sale stock in an account called Merchandise Inventory. Merchandise inventory is the stock of goods a merchandising business keeps on hand.
Merchandise Inventory is an asset account which will appear on the balance sheet.
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49. Accounts of a Merchandising Companies
<< Insert the table>>
PDF page 191
The new accounts we will be using in this chapter are summarized in this slide.
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50. Recording Sales for Cash and On Account.
The journal entry to record a sale of $500 for cash on January 2
The Sales account is the primary revenue account for a merchandising company. Let’s suppose Maxx-Out Sporting Goods sells merchandise for cash and on account. The journal entry to record a sale of $500 for cash on January 2 is provided in this slide.
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51. Recording Sales for Cash and On Account
On January 3, Maxx-Out Sporting Goods sold merchandise on credit to Roy Anderson, issuing Sales Slip 1101 for $400. The journal entry to record the sale
Maxx-Out Sporting Goods also grants credit terms to certain customers. One of those customers is Roy Anderson. On January 3, Maxx-Out Sporting Goods sold merchandise on credit to Roy Anderson, issuing Sales Slip 1101 for $400. The journal entry to record that sale is presented in this slide.
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52. Recording Sales for Cash and On Account
The journal entry records Roy Anderson’s payment of the amount due on January 31.
The journal entry presented in the slide records Roy Anderson’s payment of the amount due on January 31.
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53. Recording Sales with Sales Tax Payable for Cash and On Account
The journal entry to record a sale of $500 plus tax for cash follows.
Most state and many local governments impose a sales tax on the sale of certain goods and services. Businesses are required to collect this tax from their customers and pay to tax agency. When taxable goods and services are sold on credit, the sales tax is usually recorded at time of sale, even though it will be collected from the customer later. A liability account called Sales Tax Payable is credited for the sales tax charged.
If Maxx-Out Sporting Goods was required to charge its customers an 8 percent sales tax, the amount collected for the sales tax on a $500 sale for cash would be $40 ($500 * 8% = $40). The amount collected from the customer would be $540 ($500 for the merchandise, plus $40 for the sales tax). The journal entry to record a sale of $500 plus tax for cash is presented in the slide.
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54. Recording Sales with Sales Tax Payable for Cash and On Account
The journal entry to record the sale of merchandise on credit.
If Maxx-Out Sporting Goods sold merchandise on credit to Ann Anh on January 8 for $600 plus tax, it would bill Ann Anh for $600 plus tax of $48 (600 * 8% = $48). The total amount billed would be $648 ($600 for the merchandise, plus $48 for the sales tax). The journal entry to record that sale is presented in the slide.
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55. Sales Slip
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.
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56. Recording Sales Returns and Sales Allowances
If something is wrong with the goods sold, the firm may
take a sales return, or
give a sales allowance.
If something is wrong with the goods sold, the firm may take back the goods, resulting in a sales return. Or, they may negotiate a reduction in the sales price, resulting in a sales allowance.
If the goods returned were initially paid for with cash, the customer will receive a cash refund. When a return or allowance is related to a credit sale, the normal practice is to issue a document called a credit memorandum to the customer instead of giving a cash refund.
A cash refund is given in the case of a cash sale
A credit memorandum is given in the case of a credit sale
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57. Sales Returns and Allowances
The Sales Returns and Allowances account is debited to record returns and allowances.
Sales Returns and Allowances
Returns and Allowances
When a customer returns a product, the business makes an opposite entry of that of a sale, but instead of debiting the Sales account, we debit the Sales Returns and Allowances account.
By debiting Sales Returns and Allowances instead of debiting the Sales account, management can monitor the balance of the Sales Returns and Allowances account and see if product returns or allowances increase.
The Sales Returns and Allowances account is a contra-revenue account that keeps track of all customer returns. A contra revenue account is an account with a debit balance, which is contrary to the normal balance for a revenue account.
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58. Cash Refund The journal entry to record a cash refund:
The journal entry to record a cash refund for a return on January 2 of $100 in merchandise sold for cash, plus sales tax of $8, is presented in the slide.
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59. Credit Memorandum
Here is an example of a sales allowance which is granted to Ann Anh.
Let’s revisit the sale on account to Ann Anh of $600 plus sales tax of $48 recorded January 8, If Maxx-Out Sporting Goods issued Credit Memorandum 101 on January 20 for a return of $200 merchandise purchased on account by Ann Anh, plus 8 percent sales tax, the credit memorandum would total $216 ($200 for the merchandise returned, plus $16 sales tax previously billed to Ann Anh).
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60. Sales Returns and Allowances
Sales Allowance
Sales Returns and Allowances
Accounts Receivable
Sales Tax Payable
200 16
216
The Sales Returns and Allowances account will be debited for $200 and the Sales Tax Payable account will be debited for $16. The corresponding credit of $216 will go to the customer’s Accounts Receivable account.
Here is how it looks in the T accounts.
A sales allowance will reduce net sales on the income statement and will reduce Accounts Receivable and Sales Tax Payable on the balance sheet.
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61. Advantages of Credit Sales Disadvantages of Credit Sales
The volume of both sales and profits will increase, if buyers are given a period of a month or more to pay for the goods or services they purchase.
Disadvantages of Credit Sales
Sales on credit will lead to increases in profit only if each customer completes the transaction by paying for the goods or services purchased.
If payment is not received, the expected profits become actual losses and the purpose for granting the credit is defeated.
Therefore businesses need to closely analyze a customer’s ability to pay before granting credit.
The use of credit is considered to be one of the most important factors in the rapid growth of businesses today.
Stores grant credit to make it easier for customers to purchase goods. Like anything else, there are advantages and disadvantages.
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62. Credit Policies
Each business must develop well-balanced credit policies:
Tight credit policies results in a low level of losses.
Lenient credit policies may result in increased sales
volume with a high level of losses.
Decisions about granting credit may be based on personal judgment or on reports available from credit bureaus, information supplied by other creditors, and credit ratings supplied by national firms such as Dun & Bradstreet.
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63. Types of Credit Sales Open-account credit Business credit cards
Bank credit cards
Cards issued by credit card companies
The four most common types of credit sales are: Open-account credit, Business credit cards, Bank credit cards, and Cards issued by credit card companies. You should become familiar with what each one is and how to account for each type of transaction.
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64. Open-account credit
Open-account credit sales and business credit card sales are accounted for as sales on credit.
Sales to customers using bank credit cards, and cards issued by credit card companies, require special accounting procedures.
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65. Accounting for Credit Card Sales
Sales made to customers using bank credit
cards, such as MasterCard and VISA are treated
as cash sales.
The processing fees charged by the credit card company are debited to the Credit Card Expense account.
Sales made to customers paying with bank credit cards, such as MasterCard and VISA, are treated as cash sales. In most cases, the amount processed on the card is transferred to the seller’s bank account the same day. Fees charged by the credit card company for processing these sales are debited to an account called Credit Card Expense.
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66. Maxx-Out Sporting Goods sells merchandise on January 15 totaling $900 to customers using bank credit cards, plus 8 percent sales tax. The bank credit card company charges a 3 percent discount fee.
This is an example of sales to customers using bank credit cards.
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67. Credit Card Transactions
Journal entry to record the sales made to customers using bank credit cards on January 15.
This is how a journal entry to record the sales made to customers using bank credit cards on January 15 should look.
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68. Credit Card Companies
Sales to customers using nonbank credit cards such as American Express and Diners Club are accounted for as sales on account.
Nonbank credit cards usually take a few days to pay the seller.
The amount remitted to the seller is net of the
discount fee.
If a customer pays with a nonbank credit card such as American Express, the sale is accounted for as sales on account. The amount remitted to the seller should equal the net of the discount fee.
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69. Maxx-Out Sporting Goods sells merchandise on
January 16 totaling $1,000 to customers paying with
American Express, plus 8 percent sales tax.
American Express charges a 7 percent discount fee.
The discount withheld by American Express would be $43.20 ($1, X 4%).
This is an example of sales to customers using nonbank credit cards
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70. American Express Charges and Payments
Journal entry to record the sales on January 16 and the subsequent payment on January 23 by American Express
This is how a journal entry to record the sales of a payment by American Express should look.
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71. Accounting for Sales, Accounts Receivable, and Cash Receipts
Chapter 7
Accounting for Sales, Accounts Receivable, and Cash Receipts
Section 2: Special Topics in Merchandising
Section Objectives
7-2. Compute trade discounts.
7-3. Compute and record cash discounts on sales.
7-4. Post from the general journal to the general ledger accounts and to the subsidiary ledger.
7-5. Prepare a schedule of accounts receivable.
7-6. Record the payment of sales taxes.
In section 2 we will learn how to record transactions for a wholesaler.
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72. Computing Trade Discounts.
The basic procedures used by wholesalers to handle sales and accounts receivable are the same as those used by retailers.
However, many wholesalers offer
Cash discounts
Trade discounts
How do wholesale businesses record credit sales?
A wholesale business is a firm which sells goods to another firm who will then sell it to the final consumer.
When businesses sell goods to other businesses, they frequently offer trade and/or cash discounts, which vary according to the nature of the business. Trade discounts are not the same as cash discounts. A trade discount is a reduction from the list price. (The list price is the established retail price.)
The net price is the list price less all 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. When a firm offers more than one discount on the same sale then this is considered a series of trade discounts.
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73. Compute and record cash discounts on sales.
Modern Sportsman, a wholesaler, records the sale and subsequent payment received follow.
Modern Sportsman, a wholesaler, offers credit terms of 1/10, n/30 to its customers. On January 20, Modern Sportsman sold merchandise for $2,000 on account to Maxx-Out Sporting Goods, issuing Invoice 909. Modern Sportsman received payment for Invoice 909, less the cash discount of $20 ($2,000 1%), on January 29.
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74. Cash Discounts on Sales, with Sales Returns
A customer returning merchandise and paying within the discount period is only entitled to a cash discount on the balance owed after the return.
Modern Sportsman sells merchandise for $1,000 on account to Maxx-Out Sporting Goods on January 21, terms 1/10, n/30, Invoice 910. Maxx-Out Sporting Goods returned $100 of the merchandise on January 23, receiving credit memorandum 120 from Modern Sportsman. Maxx-Out Sporting Goods paid the balance owed, less a 1 percent discount, on January 30. The amount received by Modern Sportsman on January 30 would be $891, calculated as presented in the slide.
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75. Reporting Net Sales
At the end of each accounting period, the balance of the Sales Returns and Allowances account and the Sales Discount account is subtracted from the balance of the Sales account in the Revenue section of the income statement. The resulting figure is the net sales for the month ended January 31, 2016.
For example, the Sales Returns and Allowances account contains a balance of $600 at the end of January. The Sales Discount account balance is $100 at the end of January. The Sales account has a balance of $25,700 at the end of January. The Revenue section of the firm’s income statement is presented in the slide. Notice how the $25,000 of net sales is derived.

76. The Accounts Receivable Ledger
Accounts receivable is a big asset on the balance sheet for most businesses. This asset must be converted into cash in a timely manner. If not, cash flow problems will exist.
An accounts receivable ledger is a subsidiary ledger that contains credit customer accounts. This ledger makes it possible to verify that customers are paying their balances on time and that they are within their credit limits. It also provides a convenient way to answer questions from customers regarding their current balances or about a possible billing error.
A subsidiary ledger has three money columns. Because a business doesn’t want to wait until the end of the month to find out which customers still owe them money, any time a customer’s account is affected, the subsidiary ledger must be updated that same day.
The accounts receivable ledger has three money columns.
The BALANCE column is presumed to contain debit amounts.

77. Posting from the General Journal.
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
Each sales return or allowance must be posted from the journal to the appropriate customer’s account in the accounts receivable ledger. In addition, any subsidiary ledger accounts must be updated daily.
Please note the double posting reference if the return had been journalized in a general journal instead.

78. Prepare a 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 Accounts Receivable account (in
the General Ledger) is now considered a control
account.
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. First a schedule of accounts receivable, which lists the subsidiary ledger accounts balances, is prepared. The total of the schedule is compared with the balance of the Accounts Receivable account. If the two figures are not equal, errors must be located and corrected.
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79. 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 =
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80. Prepare a schedule of accounts receivable
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.

81. The figure illustrates the relationship between the Accounts Receivable balance, the Accounts Receivable ledger, and the Schedule of Accounts Receivable.
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82. Record the payment of sales taxes.
At the end of each month, after all the accounts have been posted, Maxx-Out Sporting Goods prepares the sales tax return.
Three accounts are involved:
Sales Tax Payable
Sales
Sales Returns and Allowances
A sales tax may be levied on all retail sales, but often certain items are exempt. The retailer is required to collect sales tax from customers, make periodic reports to the taxing authority, and pay the taxes due when the reports are filed.
Sales taxes collected must be submitted to the state on a regular basis. Sales tax returns are filed monthly or quarterly depending on the state. Maxx-Out Sporting Goods submits its sales taxes collected at the end of the month. It will complete a sales tax return.
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83. Sales Tax Computation Sales Tax Due 8% Sales Tax Rate
Taxable Gross Sales for January
$25,000.00 x
$ 2,000.00
Sales Tax Computation
Taxable gross sales for the month were $25,000. (This includes sales less any returns and allowances.) Based on the sales tax return, Maxx-Out Sporting Goods owes $2,000 of sales tax to the state. This particular state allows an offset or discount in the amount of $20, so the net taxes owed are $1,
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84. Thank you and See You Thursday at the Same Time, Take Care
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