1. Chapter 7
Skyline College

2. 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.

3. 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.

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 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.

5. 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)

6. 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

7. 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

8. The Style Shop Chart of Accounts
ASSETS
Cash
Petty Cash Fund
Notes Receivable
Accounts Receivable
Allowance for Doubtful Accounts
Interest Receivable
Merchandise Inventory
Prepaid Insurance
Prepaid Interest
Supplies
Store Equipment
Accumulated Depreciation - Store Equip.
Office Equipment
Accumulated Depreciation - Office Equip.
REVENUE
Sales
Sales Returns and Allowances
Interest Income
Miscellaneous Income
COST OF GOODS SOLD
Purchases
Freight In
Purchases Returns and Allowances
Purchases Discounts
EXPENSES
Salaries Expense - Sales
Supplies Expense
Advertising Expense
Cash Short or Over
Depreciation Expense - Store Equipment
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Utilities Expense
Telephone Expense
Uncollectible Accounts Expense
Bank Fees Expense
Delivery Expense
Depreciation Expense - Office Equipment
Interest Expense
Miscellaneous Expense
LIABILITIES
Notes Payable — Trade
Notes Payable — Bank
Accounts Payable
Interest Payable
Social Security Tax Payable
Medicare Tax Payable
Employee Income Tax Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable
Salaries Payable
Sales Tax Payable
Here is the chart of accounts for The Style Shop, our merchandising business.
OWNER’S EQUITY
Mary Amos, Capital
Mary Amos, Drawing
Income Summary

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. Sales Slip The Style Shop 400 400 S Harris 32 Total 432 Roy Anderson
8913 South Hampton Road
Dallas, TX
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.

15. The Style Shop SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX
2007 Trendsetter Lane
Dallas, TX
400
400
S Harris
Sales Tax
Total 432
Roy Anderson
8913 South Hampton Road
Dallas, TX
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
SALES ACCOUNTS SALES TAX
DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES
NO REF DEBIT CREDIT CREDIT
20--
Jan Roy Anderson 

16. SALES JOURNAL PAGE 1 SALES ACCOUNTS SALES TAX
DATE SLIP CUSTOMER’S NAME POST. RECEIVABLE PAYABLE SALES
NO REF DEBIT CREDIT CREDIT
20--
Jan Roy Anderson 
Cathy Ball 
Barbara Coe 
Amalia Rodriguez 
Fred Wu 
Linda Carter 
Kim Ramirez 
Mesia Davis  , ,000
Alma Sanchez 
Roy Anderson 
Totals , ,450
A sales journal has specialized columns for accounts that are used most often.

17. 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.

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.
DR=CR
Make sure that your total debits equal your total credits before any posting to the general ledger takes place.

19. 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 Roy Anderson
Cathy Ball
Barbara Coe
Amalia Rodriguez
Fred Wu
Linda Carter
Kim Ramirez
Mesia Davis
Alma Sanchez
Roy Anderson
Totals , ,450
(111)
(231)
(401)
Similar posting is made to the Sales account in the general ledger.
ACCOUNT Sales ACCOUNT NO
DATE DESCRIPTION POST. DEBIT CREDIT BALANCE
REF DEBIT CREDIT
20--
Jan S , ,450

20. 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

21. 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

22. The Accounts Receivable Ledger
NAME Roy Anderson
ADDRESS South Hampton, Dallas, Texas
DATE DESCRIPTION POST DEBIT CREDIT BALANCE
REF.
20 --
Jan Balance 
3 Sales Slip S
A subsidiary ledger has three money columns.
The accounts receivable ledger has three money columns.
The BALANCE column is presumed to contain debit amounts.

23. 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.

24. 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 Roy Anderson 
NAME Roy Anderson
ADDRESS 8913 South Hampton, Dallas, Texas
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 Balance 
3 Sales Slip S

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.
When something is wrong with a sale, a customer may return the goods or be granted a sales allowance.

26. 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.

27. 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.

28. 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.

29. 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: Trendsetter Lane
Dallas, TX 75268
PHONE:
Here is an example of a sales allowance which is granted to Fred Wu.
150 12
162

30. 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.

31. 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.

32. 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.

33. Posting from the General Journal
Date
20--
DESCRIPTION
POST. REF.
DEBIT
CREDIT
Jan
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 Belt Line Road, Dallas, TX
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 Balance 
21 Sales Slip S
25 CM J

34. 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.

35. 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

36. 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.

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.
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 =

38. 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.

39. 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
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 Balance  J
J S CR

40. 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.

41. 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.

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

43. 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.

44. 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 %
List price x trade discount
A single trade discount of 40% provides a discount of $600. $
Discount

45. 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

46. 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

47. 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

48. 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
ACCOUNTS
DATE INVOICE CUSTOMER’S POST RECEIVABLE DR.
NO ACCOUNT DEBITED REF SALES CR.
20--
Jan Gabbert’s Hardware Company  ,600
Neal’s Department Store  4,200
Total ,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.

49. Posting from a Single-Column Journal
SALES JOURNAL PAGE
ACCOUNTS
DATE INVOICE CUSTOMER’S POST RECEIVABLE DR.
NO ACCOUNT DEBITED REF SALES CR.
20--
Jan Gabbert’s Hardware Company  ,600
Neal’s Department Store  4,200
Total ,875
(111/401)
DATE DESCRIPTION POST DEBIT CREDIT BALANCE
REF DEBIT CREDIT
20--
Jan Balance ,700
S , ,575
ACCOUNT Accounts Receivable ACCOUNT NO
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 S , ,875
ACCOUNT Sales ACCOUNT NO

50. 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.

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 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.

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.
Some customers may never pay what is owed.

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
There are four very common types of credit sales.

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.
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.