3. CHAPTER FOURTEEN ACCOUNTING FOR SALES

4. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-3 1. Record the entries for the sale of merchandise for cash or on credit. 2. Record sales discounts. 3. Record the entries for sales returns and allowances. 4.Record sales tax. ACCOUNTING FOR SALES Objectives:

5. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-4 Recording Sales of Merchandise Sales of merchandise are recorded in a revenue account called Sales. The amount of each sale of merchandise is credit to Sales. The offsetting debit is to Cash or Accounts Receivable.

6. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-5 Transaction $760 worth of merchandise was sold for cash.

7. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-6 Transaction Analysis Cash is debited $760. Sales is credited $760.

8. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-7 Transaction $300 worth of merchandise was sold on credit.

9. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-8 Transaction Analysis Debit Accounts Receivable $300. Credit Sales in the amount $300.

10. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-9 Recording Amounts Received From Sales of Merchandise on Credit If the cash discount is taken three accounts are affected: Cash, Sales Discount and Account Receivable.

11. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-10 Transaction $291 was received for the payment of an Accounts Receivable. The sales discount is $9, ($300 x 0.03).

12. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-11 Transaction Analysis Cash is debited in the amount of $291. Sales Discount is debited in the amount of $9. Accounts receivable is credited in the full amount of $300.

13. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-12 Transaction Analysis (continued)

14. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-13 Recording Sales Returns and Allowances When a customer returns merchandise or receives an allowance, there is a decrease in revenue. This decrease is recorded by debiting the revenue account, Sales Returns and Allowances, and crediting either Cash or Accounts Receivable.

15. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-14 Recording Sales Returns and Allowances (continued) Many businesses provide a cash refund if customers return merchandise or ask for an allowance on goods sold for cash. Sales Returns and Allowances account is debited. Cash is credited.

16. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-15 Recording Sales Tax When a sales slip or invoice includes sales tax, the tax is collected from the customer and either Cash or Accounts Receivable is debited. Because the sales tax is owed to the state or city taxing authority, it is credited to a liability account called Sales Tax Payable.

17. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-16 Sales Returns and Allowances and Sales Tax Customers who return merchandise or receive an allowance from retail businesses that charge sales tax must be given a refund for the price of the goods plus the sales tax.

18. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-17 Accounting Terminology Credit sales Merchandise inventory Sales discount Sales returns and allowances Sales tax

19. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-18 Chapter Summary Sales of merchandise are credited to a revenue account called Sales. When a customer deducts a cash discount, the amount is debited to the Sales Discount account.

20. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-19 Chapter Summary (continued) The Sales Returns and Allowances account is used to record the decrease in sales revenue that results when a customer returns merchandise or receives an allowance. This account is debited for all returns and allowances. Either Cash or Accounts Receivable is credited.

21. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-20 Chapter Summary (continued) States and cities may impose a sales tax. The retailer collects this tax from customers. When sales are made, the amount of sales tax is credited to the liability account Sales Tax Payable.

22. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-21 Chapter Summary (continued) If a refund or a credit for a sales return or allowance involves sales tax, Sales Tax Payable is debited for the amount of the tax and Sales Returns and Allowances is debited for the amount of the return or allowance.

23. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-22 Investigating on the Internet As a research assignment, access the web site for Wal*Mart ® and report the sources of information that might concern sales of merchandise.

24. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-23 1. Sales of merchandise are credited to a revenue account called Sales. 2. Sales tax is normally credited to an account called Sales Tax Payable 3. Sales Returns and Allowances is usually credited when a customer returns goods or receives an allowance. Topic Quiz Answer the following true/false questions: TRUE FALSE TRUE

25. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 14-24 (Return to Topic Quiz) 3. Sales Returns and Allowances is usually credited when a customer returns goods or receives an allowance. FALSE Sales Returns and Allowances is usually debited when a customer returns goods or receives an allowance, thus reducing revenue.